P3 - Performance Strategy



This paper considers both financial and non financial risks.

Management strategies covered extend to financial instruments, and more general strategies of risk identification and management. With the growing importance of new sources of risk, the paper pays particular attention to risks arising from governance, ethical and social/environmental issues.

Note: This paper forms part of the strategic level. However, material included in any of the papers within the operational or management levels may also be relevant for the purposes of assessment.

Learning outcomes - on completion of their studies students should be able to:

Lead:
1. evaluate control systems for organisational activities and resources.

Component:
(a) evaluate appropriate control systems for the management of an organisation
(b) evaluate the appropriateness of an organisation's management accounting control systems
(c) evaluate the control of activities and resources within an organisation
(d) recommend ways in which identified weaknesses or problems associated with control systems can be avoided or solved

Indicative syllabus content:

• the ways in which systems are used to achieve control within the framework of an organisation (eg contracts of employment, policies and procedures, discipline and reward, reporting structures, performance appraisal and feedback)
• the application of control systems and related theory to the design of management accounting control systems and information systems in general (ie control system components, primary and secondary feedback, positive and negative feedback, open and closed-loop control)
• structure and operation of management accounting control systems (eg identification of appropriate responsibility and control centres within the organisation, performance target setting, avoiding unintended behavioural consequences of using management accounting controls)
• variation in control needs and systems dependent on organisational structure (eg extent of centralisation versus divisionalisation, management through strategic business units)
• assessing how lean the management accounting system is (eg extent of the need for detailed costing, overhead allocation and budgeting, identification of non-value adding activities in the accounting function)
• cost of quality applied to the management accounting function and getting things right first
  time

Learning outcomes - on completion of their studies students should be able to:

Lead:
1. discuss the importance of management review of controls.

Component:
(a) discuss the importance of management review of controls

Indicative syllabus content:

• the process of review (eg regular reporting to management on the effectiveness of internal controls over significant risks) and audit of internal controls
• major tools available to assist with a review and audit process (eg audit planning, documenting systems, internal control questionnaires, sampling and testing)

Lead:
2. evaluate the process and purposes of audit in the context of internal control systems.

Component:
(a) evaluate the process of internal audit and its relationship to other forms of audit
(b) produce a plan for the audit of various organisational activities including management, accounting and information systems
(c) recommend action to avoid or solve problems associated with the audit of activities and systems
(d) recommend action to improve the efficiency, effectiveness and control of activities
(e) discuss the relationship between internal and external audit work

Indicative syllabus content:

• role of the internal auditor and relationship of the internal audit to the external audit
• relationship of internal audit to other forms of audit (eg value-for-money audit, management audit, social and environmental audit)
• operation of internal audit, the assessment of audit risk and the process of analytical review, including different types of benchmarking, their use and limitations
• particular relevance of the fundamental principles in CIMA's ethical guidelines to the conduct of an impartial and effective review of internal controls
• detection and investigation of fraud
• the nature of the external audit and its process, including the implications of internal audit findings for external audit procedures

Lead:
3. discuss corporate governance and ethical issues facing an organisation.

Component:
(a) discuss the principles of good corporate governance for listed companies, for conducting reviews of internal controls and reporting on compliance
(b) discuss the importance of exercising ethical principles in conducting and reporting on internal reviews

Indicative syllabus content:

• the principles of good corporate governance for listed companies, for the review of the internal control system and reporting on compliance
• application of the CIMA code of ethics for professional accountants to the resolution of ethical conflicts in the context of discoveries made in the course of internal review, especially section 210

Learning outcomes - on completion of their studies students should be able to:

Lead and component:
1. evaluate financial risks facing an organisation.

Indicative syllabus content:

• sources of financial risk, including those associated with international operations (e.g. hedging of foreign investment value) and trading (e.g. purchase prices and sales values)
• transaction, translation, economic and political risk
• quantification of risk exposures, their sensitivities to changes in external conditions and their expected values

Lead:
2. evaluate alternative risk management tools.

Component:
(a) evaluate appropriate methods for managing financial risks
(b) evaluate the effects of alternative methods of risk management
(c) discuss exchange rate theory and the impact of differential inflation rates on forecast exchange rates
(d) recommend risk management strategies and discuss their accounting implications.

Indicative syllabus content:

• minimising political risk (e.g. gaining government funding, joint ventures and obtaining local finance)
• operation and features of the more common instruments for managing interest rate risk: swaps, forward rate agreements, futures and options (note: numerical questions will not be set involving FRAs, futures or options; see the note below relating to the Black Scholes model)
• operation and features of the more common instruments for managing currency risk: swaps, forward contracts, money market hedges, futures and options (note: the Black Scholes option pricing model will not be tested numerically, however, an understanding of the variables which will influence the value of an option should be appreciated)
• simple graphs depicting cap, collar and floor interest rate options
• theory and forecasting of exchange rates (e.g. interest rate parity, purchasing power parity and the Fisher effect)
• principles of valuation of financial instruments for management and financial reporting purposes (IAS 39), and controls to ensure that the appropriate accounting method is applied to a given instrument
• quantification and disclosure of the sensitivity of financial instrument values to changes in external conditions
• internal hedging techniques (e.g. netting and matching)