The CII AF2 March 2021 Exam in Review

This time, we’re looking at the AF2 exam from the March 2021 sitting.  This is the exam that covers business financial planning.

You can find a copy here.

Candidates are given three hours to answer 3 case study style questions for a total of 160 marks.

Question 1

The first case study concerned three shareholding directors of a private limited company named Qualitatium Ltd, with Ivan owning 35% of the shares.  Ivan wished to leave the company and set up a new business.  Another company, Calcosis Ltd, was interested in buying merchandise from them.  As is often the case in AF2, a profit and loss account and balance sheet were given.

The first question asked for a calculation of operating profit margin, current ratio, acid ratio, creditor ratio, and finally from the ratios calculated, explain why Qualitatium Ltd should supply Calcosis Ltd. This was for 21 marks in total and is a standard question within AF2.

Next, candidates had to state a benefit and a drawback of Qualitatium Ltd buying its own shares, the legal conditions under the Companies Act 2006 that will apply to the share buyback and also state the benefit to Ivan if the proceeds from the share purchase were treated as a capital payment as well as the conditions that apply if the proceeds of the share purchase are to be treated as a capital payment.  This question gave a total of 15 marks.

Part (c) asked for the advantages to Ivan of his investing in Calcosis as an equity investment or as a secured loan.  This was for a total of 14 marks.

In part (d), candidates had to list three items of evidence an insurer’s underwriter would require to justify an appropriate level of life cover; identify four potential issues with using a multiple of salary approach to determine cover, and in part (iii), calculate a level of cover using the proportion of profits formula. This was for a total of 11 marks and again is an area that has been tested many times before.

In part (e), candidates were asked to list the three components essential for a share purchase plan to be effective and state why the model articles alone are insufficient for share purchase plans. This was for a total of 5 marks.

The final part of this first question was a comparison of the tax and National Insurance contributions implications for Ivan if he sets up his new business as a sole trader or as a limited company.  This was a very nice end to what was probably a challenging first case study to some candidates.

Question 2

In Case Study 2, we were introduced to Speedy Lettings, set up as a partnership by Henning, Karina and Maggie.  Henning wished to leave the partnership and withdraw his capital.

Firstly, candidates had to explain why the partners should have had a written partnership agreement rather than relying on the provisions of the Partnership Act 1890.  This was for 9 marks and is a very well tested area of the syllabus so should have been well answered by candidates.

In part (b), candidates had to describe the extent to which Karina and Maggie were liable on a contract made by Henning to an advertising agency.  This was for 8 marks.

In (c), candidates were asked to explain how Henning can leave the partnership and obtain a repayment of his capital. This was for 5 marks.

In (d) and for 10 marks, candidates had to state the benefits and drawbacks of the partnership converting to an LLP.

The final part of Question 2 asked for a description of the benefits and drawbacks of a single option agreement linked to critical illness cover for partners, and this was for 8 marks.

Again, this was a challenging case study drawing out some of the more difficult parts of the AF2 syllabus.

Question 3

Onto the final case study question which involved Jodie and Rick, the shareholders of a cake company, with Jodie owning 51% of the shares and Rick owning 49%.  The company had set up an SSAS, and the shareholders had found a commercial property they wished to purchase.

This was both a calculation and theory; candidates firstly had to calculate whether the purchase of the commercial property could be funded with the maximum amount of borrowing via the SSAS and in part two, explain the financial implications for the company should the premises be purchased using the SSAS. This was for a total of 15 marks.

Part (b) asked for an explanation of the Income Tax implications for Jodie and Rick assuming they buy the premises personally and the company pays them rent. Part (ii) asked candidates to explain the CGT implications if the property bought personally is sold at a later date and part (ii) asked for the IHT consequences. The whole question was worth 17 marks.

The final question of Case Study 3 asked candidates to identify the benefits of buying the property through the SSAS rather than Jodie and Rick buying it personally. This final question was for 8 marks.

This part of the syllabus is tested frequently so should not have been a surprise to candidates and those who had studied well should have done well.

Candidates studying for any AF exam should remember to always relate their answers to the case study.  This is imperative to score all the marks on offer – it seems from examiner guides that this is still not happening with all candidates who will therefore be losing valuable marks.

Comparison with the October 2020 Exam Paper

If we look at what was tested in October 2020’s paper, we can see if there has been any overlap. This question paper can be found here.

The topics covered were:

• Benefits and drawbacks of trading as a limited company rather than a partnership.
• Crowdfunding and raising finance
• Calculation of net income if profit taken as a dividend
• Benefits of taking salary plus a dividend rather than just a dividend
• Tax treatment applied to a partnership that has transferred its business to a ltd company
• TUPE
• Shareholder protection
• Pension auto-enrolment
• Ratios: operating profit, current ratio, creditor days ratio and gearing
• Wrongful trading
• Members’ voluntary liquidation
• HMRC requirements for purchase of a shop via a SIPP
• Calculation of costs when purchasing a property via a SIPP and how much can be borrowed
• Advantages of using a SIPP to buy commercial property

Grab the resources you need!

If you’re having to re-sit the 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!