The CII AF2 April 2018 Exam in Review

It’s the turn of AF2 the Business Financial Planning module and the scrutiny of the April exam paper. This is useful reading for those studying for their CII AF2 exam.

If you haven’t seen it yet, here is the link.

Question 1

Question 1 this time concerned equal shareholders in a small private limited company, reliant on two major customers that accounted for most of its turnover; one of these customers they had recently lost.  We are also told about two members of staff, Chelsea and Dylan and are also given an extract from the profit and loss account.

The first question asks about financial ratios; four advantages and six limitations.  Not a bad start to an AF2 paper.

We are then told that Chelsea and Dylan are considering a management buy-out, and we need to give 6 factors they would need to take account of to better understand the viability of the Company.  The question continues with more factors – this time, those that should be taken into account when valuing the business for the MBO and three methods of raising finance.  The third part of this question relates to shareholder and key person protection for Chelsea and Dylan.

Part (d) of Question 1 has the first calculation – a small 2-part question asking how much Geoffrey could expect to realise from the sale of the business assets and then for part (ii) an explanation of why the figure in the answer may not be realised.

Part (e) was a nice question – asking why a business owner should build up resources outside of the business, which could be used as a retirement fund.

Part (f) was about winding up the Company – 19 marks in total, 6 of which were how they can utilise the loss if the Company ceases trading; 5 marks for the reasons why they would have the option of starting a members’ voluntary wind-up of the Company and finally, for 7 marks, the steps that the directors must take if they do decide to voluntarily wind up the company.

The final question was regarding the responsibilities towards the employees should they close the business for 7 marks and for 4 marks, a quick question on statutory redundancy pay.

All in all, Question 1 was a reasonable mix of some challenging questions peppered with some easier marks to pick up.

Question 2

Onto Question 2 and a much more straightforward question of less than half a page of case study information!  This question concerned a sole trader wanting advice on reducing her tax and NI position and why incorporating might be a good idea. The question started off very gently with the main drawbacks of being a sole trader and then the main disadvantages should she choose to trade as a limited company.

The third question was a 10-mark calculation of her income tax and NI, which should have been no problem to any AF2 student.  It did then develop with the assumption that she did incorporate the business and another calculation this time of net distributable profit and then her own income tax and NI liabilities.   The final question concerned IR35, which also should have not proved a problem for delegates. All in all, this question was a fair one with plenty of reasonable marks available for the well-prepared student.

Question 3

The final question for this exam paper concerned a married couple who were equal shareholders in a vegan restaurant, who rent premises they are interested in buying.  We are then told they have a SSAS, so already we know where one of the questions will go!

The first question was a nice 4-mark question on a SDLT calculation.  The second question was also a calculation, and for 8 marks, delegates had to calculate how the couple could fund the purchase via the SSAS.  The next question assumed they borrow funds to fund the purchase and delegates had to explain the income tax and NI implications assuming the business pays a full market rent and description of the CGT implication when the property is later sold.  The exam continued with more questions around the purchase of the property – firstly, the implications of the business buying the property and then, the advantages to the couple of the SSAS buying the property over the other two options.  The final question did change the subject finally (!) and asked the actions the Pensions Regulator will take with regards the business failure to put in place an auto enrolment scheme.

Comparing with October 2017’s AF2 Exam Paper

Let’s compare this with last October’s paper:

http://www.cii.co.uk/media/7774724/af2_october_2017_qp.pdf

Question 1 concerned Gerald, the sole shareholding director of a small company with 8 employees.  He was considering winding up the company or finding a buyer.

Out of the 7 questions (from a – g) only one was a calculation; for 8 marks, students had to calculate the amount of statutory redundancy pay for one of the employees.  The rest of the questions were all theory, the first two covering the business reasons why a competitor might wish to buy the business and an explanation of why it might be preferable for Gerald to sell the shares and business premises and an explanation of how the proceeds will be taxed.

The exam continued with testing of employment law and how both buyer and seller must comply with TUPE – the Transfer of Undertakings (Protection of Employment) Regulations 2006.

The rest of the questions were on a ‘pre-pack’ arrangement, where students had to describe how one works, the advantages to Gerald and the disadvantages to the buyer.

The last question covered the IHT implications of Gerald’s’ will, taking into account that he is not married to his partner and the tax implications for a trust.  These two issues were only for 5 marks.

Section B started with another smaller case study, again a sole trader with recent employees and commercial premises to purchase.   The questions seemed straightforward starting with a calculation to work out the total cost of buying the business, and it continued with another calculation, this time on the maximum pension contribution he could make, the advantages of his buying the property through a SIPP and finally, now he has employees, what his auto enrolment responsibilities are.

The final question concerned three engineers who wanted to set up on their own.  The questions were around the four legal forms of business, business protection and which would be appropriate given the circumstances in the case study.  There were also a couple of calculations on income tax and corporation tax.  AF2 students know these topics will be tested, and so there should be no excuses for not getting the fundamental facts right.

There does appear to have a little bit of overlap with these papers, so it’s always useful for future students to study very carefully the previous exam guides to get a feel of how they should answer an AF2 question but also the types of question that typically come up.  The pass rates for AF2 have historically been low, but as with all the advanced papers, it’s all about the application of technical knowledge not just a repetition of facts.

Grab the resources you need!

If you’re studying for your CII AF2 exam, and you’re wanting to feel prepared on exam day, you’ll need to practise applying the knowledge. Grab our free taster to try out one of Brand Financial Training’s resources for yourself.  Click the link to download the AF2 calculation workbook taster now!