Final syllabus subject to approval and confirmation, June 2010

Unit 1: The Investment Environment

Investment management and advice in the UK context
Version 8 (September 2010)

Topic 1: The UK Financial Services Industry – a European and Global

context
Demonstrate an understanding of the UK financial services industry, in its European and
global context

Section 1.1: The Financial Services Industry and the role of Government
1.1.1 explain the functions of the financial services industry;
1.1.2 evaluate the role and impact of the main financial institutions;
1.1.3 explain the role of government including economic and industrial policy,
regulation, taxation and social welfare.

Section 1.2: The Impact of EU Directives on the Investment Industry

1.2.1 explain the legal status of EU Directives within the UK;
1.2.2 explain the purpose and scope of the Markets in Financial
Instruments Directive (MiFID) with respect to:
- passporting
- roles of the home and host state
- core and non-core investment services
- financial instruments covered by the legislation;
1.2.3 explain the purpose and scope of the UCITS Directives.

Topic 2: Financial Markets

Demonstrate an understanding of UK and International financial markets

Section 2.1: UK equity and fixed interest markets

2.1.1 identify the main dealing systems and facilities offered in the UK equities
market;
2.1.2 identify the nature of the stocks that would be traded on each of the
above systems and facilities;
2.1.3 explain the structure and operation of the primary and secondary UK
markets for gilts and corporate bonds;
2.1.4 explain the motivations for and implications of dual listing of a company.

Section 2.2: Types of markets

2.2.1 compare and contrast exchange trading and over-the-counter (otc)
markets
2.2.2 distinguish between the following alternative trading venues:
- Multilateral Trading Facilities
- Systematic Internalisers

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- Dark Pools
2.2.3 distinguish between a quote-driven and order-driven market;
2.2.4 explain the roles of the various participants in the UK equity market.

Section 2.3: Settlement procedures in UK

2.3.1 explain the clearing and settlement procedures for UK exchange traded
securities;

Section 2.4: Regulation of UK investment exchanges

2.4.1 explain the role of an investment exchange;
2.4.2 explain the need for investment exchanges to be authorised;
2.4.3 explain the relevance of investment exchanges being recognised by the
FSA;
2.4.4 identify the recognised investment exchanges and clearing houses in the
UK;
2.4.5 identify and distinguish the roles of
- the London Stock Exchange (LSE)
- NYSE Liffe
- LCH.Clearnet

Section 2.5: The UK Listing Authority and prospectus requirements

2.5.1 explain the role of the FSA as the UK listing authority;
2.5.2 identify the source of the listing rules as FSMA 2000 and relevant EU
directives;
2.5.3 explain the main conditions for listing on the Official List, AIM and PLUS
markets;
2.5.4 explain the purpose of the requirement for prospectus or listing
particulars;
2.5.5 identify the main exemptions from listing particulars.

Section 2.6: Information disclosure and corporate governance

requirements for UK equity markets
2.6.1 explain the disclosures required under the FSA’s disclosure and
transparency rules relating to:
- directors’ interests
- major shareholdings;
2.6.2 explain the purpose of corporate governance regulation;
2.6.3 explain, in outline, the scope and content of corporate governance
regulation in the UK (the Combined Code);
2.6.4 explain the LSE requirements for listed companies to disclose corporate
governance compliance;
2.6.5 explain the continuing obligations of LSE listed companies regarding
information disclosure and dissemination;
2.6.6 explain, in outline, the UK company law requirements regarding the
calling of general meetings;
2.6.7 distinguish between extraordinary and annual general meetings;

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2.6.8 distinguish between the types of resolution that can be considered at

company general meetings;
2.6.9 distinguish between the voting methods used at company meetings;
2.6.10 explain the role and powers of a proxy.

Section 2.7: Regulation of derivatives markets

2.7.1 identify the main features of the regulation of derivatives;
2.7.2 identify the main features of clearing and settlement on derivatives
exchanges and for over-the counter derivatives trading;
2.7.3 explain the arrangements for market transparency and transaction
reporting in the main derivative markets;
2.7.4 explain the impact of MiFID and International Accounting Standards on
the regulation of derivative markets.

Section 2.8: International Markets

2.8.1 explain the mechanics of dealing in equities and fixed interest securities
in each of the following specific countries:
- US
- Japan
- France
- Germany;
2.8.2 identify the participants in each of the above markets;
2.8.3 explain the structure and operation of the primary and secondary markets
for Eurobonds;
2.8.4 explain the general principles of dealing in other markets including
emerging markets and settlement issues in those markets.

Section 2.9: International Settlement and Clearing

2.9.1 explain the settlement and clearing procedures overseas including the
role of international central securities depositories, an appreciation of
different settlement cycles and issues in managing global assets.

Topic 3: Legal Concepts

Demonstrate an understanding of legal concepts relevant to financial advice
3.1.1 explain legal persons and power of attorney;
3.1.2 explain basic law of contract and agency;
3.1.3 explain the types of ownership of property;
3.1.4 explain insolvency and bankruptcy;
3.1.5 explain wills and intestacy;
3.1.6 identify the main types of trusts and their uses.

Topic 4: Regulation of Financial Services

Demonstrate an understanding of the regulation of financial services
4.1.1 distinguish between the regulatory roles of the Financial Services
Authority (FSA), HM Treasury and the Bank of England;

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4.1.2 explain the function of the following bodies/persons

- the Panel for Takeovers and Mergers
- the Department for Business Innovation and Skills;
- the Office of Fair Trading;
- the Competition Commission;
- The Information Commissioner;
4.1.3 explain the make up of the Panel on Takeovers and Mergers (the
takeover panel) and how it is financed;
4.1.4 explain the regulatory power of the City Code on Takeovers and Mergers;
4.1.5 explain the main provisions of the City Code including the bid timetable;
4.1.6 explain the scope of the Financial Services and Markets Act 2000;
4.1.7 explain the scope of the Regulated Activities Order 2001 (as amended) in
terms of:
- regulated activities
- regulated investments;
4.1.8 explain the purpose and scope of the FSA’s rules regarding Senior
Management Arrangements, Systems and Controls (SYSC);
4.1.9 explain the purpose and scope of the Trustee Act 2000
- the rights and duties of the parties involved
- the nature of the trust deed
- investment powers of trustees;
4.1.10 explain the significance of the Pensions Act 2004
- scheme specific funding requirement
- the Pensions Regulator
- the Pension Protection Fund;
4.1.11 explain the purpose of a Statement of Investment Principles.

Topic 5: The Role of the Financial Services Authority (FSA)

Demonstrate an understanding of the FSA’s responsibilities and approach to regulation
5.1.1 explain the role and statutory objectives of the FSA;
5.1.2 identify and distinguish among the blocks of the FSA handbook;
5.1.3 explain, in outline, the procedure for authorisation of firms, including
knowledge of the threshold conditions;
5.1.4 explain the FSA’s risk based approach to supervision and the
enforcement and disciplinary powers of the FSA relating to:
- information gathering (EG 3)
- variation and cancellation of Part IV permission (EG 8)
- prohibition of individuals (EG 9)
- restitution and redress (EG 11)
- statutory notices (DEPP 1 & 2).

Topic 6: The Regulatory Framework

Demonstrate an ability to apply the principles and rules as set out in the regulatory
framework

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Section 6.1: Approved persons, controlled functions, training and

competence
6.1.1 define an approved person;
6.1.2 define a controlled function;
6.1.3 identify the types of controlled functions defined within the FSA handbook
(SUP 10);
6.1.4 identify the main assessment criteria in the FSA’s Fit and Proper Test for
approved persons (FIT);
6.1.5 explain the application procedure for approved persons (SUP 10);
6.1.6 explain the procedure for an approved person moving within a group
(SUP 10);
6.1.7 explain the requirements relating to training and competence.

Section 6.2: Record keeping and reporting information

6.2.1 apply the rules relating to record keeping;
6.2.2 apply the rules relating to occasional reporting to clients (COBS 16.2);
6.2.3 apply the rules relating to periodic reporting to clients (COBS 16.3).

Section 6.3: Market Conduct and Financial Crime

6.3.1 explain the various sources of money laundering and counter terrorism
regulation and legislation
- FSA rules
- Money Laundering Regulations
- Proceeds of Crime Act 2002;
6.3.2 explain the role of the Joint Money Laundering Steering Group (JMLSG);
6.3.3 explain the main features of the guidance provided by the JMLSG;
6.3.4 explain the three stages involved in the money laundering process;
6.3.5 explain the four offence categories under UK money laundering
legislation;
6.3.6 explain the meaning of ‘inside information’ covered by CJA 1993;
6.3.7 explain the offence of insider dealing covered by the CJA:
6.3.8 identify the penalties for being found guilty of insider dealing;
6.3.9 explain the FSA’s powers to prosecute insider dealing;
6.3.10 understand the nature of behaviours defined as market abuse (MAR
1.3,4,5,6,7,8. &9);
6.3.11 explain the enforcement powers of the FSA relating to market abuse
(MAR 1.1.4,5 &6);

Section 6.4: Complaints handling, the Financial Ombudsman Service and

the Financial Services Compensation Scheme
6.4.1 explain the FSA rules relating to handling of complaints (DISP 1.3);
6.4.2 explain the role of the Financial Ombudsman Service (DISP Introduction
and DISP 2);
6.4.3 distinguish compulsory from voluntary jurisdiction (DISP Introduction);
6.4.4 explain the procedure and time limits for the resolution of complaints
(DISP 1.4, 1.5 and 1.6);
6.4.5 apply the rules relating to record keeping and reporting (DISP 1.9,
1.10);

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6.4.6 apply the rules relating to determination by the Ombudsman (DISP 3);
6.4.7 explain the purpose of the Financial Services Compensation Scheme
(FSCS) (COMP 1.1.7);
6.4.8 identify the circumstances under which the FSCS will pay compensation
(COMP 1.3.3, 3.2.1 (1)&(2), 4.2.1 & 2 (1) to (6));
6.4.9 identify the limits on the compensation payable by the FSCS (COMP
10.2.1,2 &3).

Topic 7: The Regulatory Advice Framework

Demonstrate the ability to apply the regulatory advice framework in practice for the
consumer

Section 7.1: Accepting customers for business

7.1.1 explain the purpose of client classification;
7.1.2 distinguish between a retail client, a professional client and an eligible
counterparty (COBS 3.4, 3.5, 3.6);
7.1.3 apply the rules relating to treating a client as an elective professional
client (COBS 3.5.3);
7.1.4 apply the rules relating to treating a client as an elective eligible client
(COBS 3.6.4);
7.1.5 apply the rules relating to providing clients with a higher level of
protection (COBS 3.7);
7.1.6 apply the rules relating to client agreements (COBS 8.1);

Section 7.2: Financial promotions and other communications with

customers
7.2.1 explain the purpose and scope of the financial promotions rules and the
exceptions to them (COBS 4.1);
7.2.2 explain the fair, clear and not misleading rule (COBS 4.2);
7.2.3 explain the rules relating to communications with retail clients (COBS
4.5);
7.2.4 explain the rules relating to past, simulated past and future performance
(COBS 4.6);
7.2.5 explain the rules relating to direct offer promotions (COBS 4.7);
7.2.6 explain the rules relating to cold calls and other promotions that are not
in writing (COBS 4.8);
7.2.7 explain the rules relating to systems and controls in relation to
approving and communicating financial promotions (COBS 4.10);
7.2.8 explain the record keeping requirements relating to financial promotions
(COBS 4.11);
7.2.9 explain the rules relating to distance marketing communications (COBS
5.1);
7.2.10 explain the rules relating to providing information about the firm and
compensation information (COBS 6.1).

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Section 7.3: Identifying client needs, information about the firm and
investment research

7.3.1 explain the rules relating to assessing suitability (COBS 9.2);

7.3.2 explain the rules relating to assessing appropriateness (COBS 10.2);
7.3.3 explain the rules relating to warning a client (COBS 10.3);
7.3.4 identify circumstances when assessing appropriateness is not required
(COBS 10.4, 10.5 and 10.6);
7.3.5 identify circumstances where own authority or expertise is limited and
the need to refer to specialists;
7.3.6 explain the rules relating to investment research produced by a firm and
disseminated to clients (COBS 12.2);
7.3.7 explain the rules relating to the publication and dissemination of non-
independent research (COBS 12.3);
7.3.8 explain the disclosure requirements relating to the production and
dissemination of research recommendations (COBS 12.4);

Section 7.4: Product disclosure – packaged products

7.4.1 explain the obligations relating to preparing product information (COBS
13.1);
7.4.2 explain the rules relating to the form and content of a key features
document (COBS 13.2 and 13.3);
7.4.3 explain the rules relating to cancellation rights (COBS 15);

Section 7.5: Client assets and Client Money Rules

7.5.1 explain the concept of fiduciary duty;
7.5.2 explain the application and purpose of the rules relating to custody of
client assets held in connection with MIFID business (CASS 6.1);
7.5.3 explain the rules relating to the protection of clients’ assets and having
adequate organisation arrangements (CASS 6.2);
7.5.4 explain the rules relating to depositing assets with third parties (CASS
6.3);
7.5.5 explain the purpose of the rules relating to the use of clients’ assets
(CASS 6.4);
7.5.6 explain the rules relating to records, accounts and reconciliations of
clients’ assets (CASS 6.5);
7.5.7 explain the application and general purpose of the client money rules
(CASS 7.2);
7.5.8 explain the rules relating to the segregation of client money (CASS 7.4);
7.5.9 explain the rules relating to records, accounts and reconciliations of client
money (CASS 7.6).

Section 7.6: Dealing and Managing

7.6.1 explain the rules relating to best execution (COBS 11.2);
7.6.2 explain the rules relating to client order handling (COBS 11.3);
7.6.3 explain the rules relating to the use of dealing commission (COBS 11.6);
7.6.4 explain the rules on personal account dealing (COBS 11.7).

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Topic 8: The FSA’s use of principles and outcomes based regulation

Demonstrate an understanding of the FSA’s use of principles and outcomes based
regulation to promote ethical and fair outcomes
8.1.1 explain the application and purpose of the FSA’s Principles for
Businesses (PRIN 1.1.1 & 2);
8.1.2 explain the consequences of breaching the FSA’s Principles for
Businesses (PRIN 1.1.7 to 9 and DEPP 6.2.14 & 15);
8.1.3 identify the FSA’s Principles for Businesses (PRIN 2.1.1 and PRIN 4);
8.1.4 explain the importance of corporate culture and leadership;
8.1.5 explain the application and purpose of the Statements of Principle and
Code of Practice for approved persons (APER).

Topic 9: Code of Ethics and Professional Standards

Demonstrate an ability to apply the Code of ethics and professional standards to
business behaviours of individuals
9.1.1 Identify the elements of the CFA Code of ethics;
9.1.2 explain the professional principles and values on which the Code is
based;
9.1.3 apply the Code to a range of ethical dilemmas.

Topic 10: Ethical and Compliance Driven Behaviour

Demonstrate an ability to critically evaluate the outcomes that distinguish between
ethical and compliance driven behaviour
10.1.1 identify typical behavioural indicators;
10.1.2 critically evaluate the outcomes which may result from behaving ethically
– for the industry, individual advisers and consumers;
10.1.3 critically evaluate the outcomes which may result from limiting behaviour
to compliance with the rules – for the industry, firm, individual advisers
and consumers.

Topic 11: Retail Clients

Demonstrate an understanding of how the retail customer is served by the financial
services industry
11.1.1 explain the obligations of a firm towards consumers and their perceptions
of financial services;
11.1.2 explain the main needs of consumers and how they are prioritised;
11.1.3 identify suitable investment solutions to suit different needs of consumers.

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Topic 12: Client Objectives and the Investment Advice Process

Demonstrate an ability to apply the investment advice process

Section 12.1: The client’s financial objectives

12.1.1 explain the importance of establishing and quantifying a client’s
objectives;
12.1.2 explain the need to prioritise objectives to accommodate a client’s
affordability.

Section 12.2: The client’s current circumstances

12.2.1 explain the importance of the fact find process in establishing a client’s
current financial circumstances;
12.2.2 identify the factors shaping a clients’ circumstances.

Section 12.3: The client’s attitude to risk

12.3.1 analyse the main types of investment risk as they affect investors;
12.3.2 explain the role of diversification in mitigating risk;
12.3.3 analyse the impact of timescale on a client’s attitude to risk;
12.3.4 explain the key methods of determining a client’s attitude to risk.

Section 12.4: Advice and recommendations

12.4.1 explain why asset allocation always comes before investment or product
selection;
12.4.2 explain the key roles of past performance, charges and the financial
stability of the provider as criteria within the fund selection process;
12.4.3 explain the importance of stability, independence and standing of
trustees, fund custodians and auditors in the fund selection process;
12.4.4 identify benchmarks and other performance measures;
12.4.5 explain the importance of reviews within the financial planning process.

Section 12.5: The objectives of pension funds, life assurance and general
insurance companies and the factors that impact upon their investment
decisions
12.5.1 explain the features and objectives of the following funds in the UK:
- pension funds (defined benefit and defined contribution)
- life assurance funds
- general insurance funds
12.5.2 distinguish among the typical asset allocations for the above funds;
12.5.3 explain the return objectives of the major fund types;
12.5.4 classify funds by their income/capital growth requirements;
12.5.5 explain the effect of each of the following on a fund’s asset allocation:
- time horizons
- liability structure
- liquidity requirements.
12.5.6 explain the taxation of the various types of funds in the UK;

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12.5.7 explain the effect that tax legislation may have on the stock selection and
asset allocation of a fund;
12.5.8 identify the other types of legal requirements that affect pension,
insurance funds and private clients.

Topic 13: Skills required when advising clients

Demonstrate an understanding of the range of skills required when advising clients
13.1.1 communicate clearly, assessing and adapting to the differing capabilities
of clients;
13.1.2 evaluate the factors shaping a clients’ needs and circumstances;
13.1.3 apply suitable investment solutions to suit different types of
circumstances;

Topic 14: The UK tax system

Demonstrate an understanding of the UK tax system as relevant to the needs and
circumstances of individuals and trusts
14.1.1 explain the principles of income tax applicable to earnings, savings and
investment income in the UK;
14.1.2 explain in relation to income tax the system of allowances, reliefs and
priorities for taxing income;
14.1.3 explain the taxation of the income of trusts and beneficiaries;
14.1.4 explain the system of national insurance contributions;
14.1.5 explain the principles of capital gains tax in the UK;
14.1.6 explain the principles of inheritance tax;
14.1.7 explain the implications of residence and domicile in relation to liability
to income, capital gains and inheritance tax;
14.1.8 explain the system of UK tax compliance including self assessment,
Pay As You Earn (PAYE), tax returns, tax payments, tax evasion and
avoidance issues;
14.1.9 explain the principles of stamp duty land tax (SDLT) as applied to
property transactions – buying/selling and leasing;
14.1.10 explain the principles of stamp duty reserve tax (SDRT);
14.1.11 explain how companies are taxed in the UK;
14.1.12 explain in outline the principles of Value Added Tax (VAT)

Topic 15: The taxation of investments

Demonstrate an ability to analyse the taxation of investments as relevant to the needs
and circumstances of individuals and trusts
15.1.1 analyse the taxation of direct investments including cash and cash
equivalents, fixed interest securities, equities and property;
15.1.2 analyse the taxation of indirect investments including pension
arrangements, individual savings accounts (ISAs) , child trust
funds(CTFs), onshore and offshore collective investment schemes and

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investment companies, onshore and offshore life assurance policies,

real estate investment trusts and Venture Capital Trusts (VCTs) and
Enterprise Investment Schemes (EISs).

Topic 16: Tax planning

Demonstrate an ability to analyse the role and relevance of tax in the financial affairs of
individuals and trusts
16.1.1 explain the limitations of lifetime gifts and transfers at death in mitigating
IHT;
16.1.2 analyse the key principles of income tax planning – spouse, civil
partners, children, pension contributions, ISA allowances and other tax
advantaged schemes (EIS and VCT’s etc.);
16.1.3 analyse how the use of annual CGT exemptions, the realisation of
losses, the timing of disposals, and sale and repurchase of similar
assets can mitigate CGT.

Topic 17: Application of personal tax planning to investment advice

Demonstrate an ability to apply the knowledge of personal taxation to the provision of
investment advice
17.1.1 To carry out computations on the most common elements of income tax
and NICs; CGT; IHT including the impact of lifetime transfers and
transfers at death;
17.1.2 To make elementary tax planning recommendations in the context of
investments and pensions advice.

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 Unit 2: Investment practice
Version 8 (September 2010)

Topic 18: Asset Classes

Demonstrate an ability to evaluate the characteristics, inherent risks, behaviour and
correlation of asset classes

Section 18.1 Equity Capital Characteristics

18.1.1 identify the characteristics, and the risks to the investor, of the various
classes of equity capital;
18.1.2 explain the reasons for issuance of preference shares and the
implications to the investor;
18.1.3 explain the characteristics of Global and American Depository Receipts.

Section 18.2 Equity Issuance

18.2.1 distinguish between primary and secondary share issuance;
18.2.2 explain the key features of the following equity issuance methods:
- placing
- intermediaries offer
- offer for sale
- offer for sale by subscription.
18.2.3 define and explain the purpose of a rights issue, a scrip issue and a stock
split;
18.2.4 calculate the theoretical ex-rights price and the value of the right (nil-paid)
given the cum-rights price, the issuance ratio and the subscription price;
18.2.5 calculate the theoretical ex-scrip price given the scrip ratio and the cum-
scrip price;
18.2.6 evaluate the options open to an investor in response to a rights offer and
explain the effect on the investor’s wealth;
18.2.7 explain the motivations behind a company buying back its own shares.

Section 18.3: Equity Valuation

18.3.1 calculate a holding period return for an ordinary share, comprising capital
gain and dividend income;
18.3.2 explain the components, assumptions and limitations of the dividend
discount model (Gordon’s growth model);
18.3.3 calculate the present value of a share using the dividend discount model;
18.3.4 calculate an estimated growth rate for dividends using historic data or
using return on equity and a retained earnings ratio;
18.3.5 explain the reasons for a company’s chosen dividend policy;
18.3.6 explain the practical constraints on companies paying dividends;
18.3.7 explain the importance of the dividend yield and dividend cover in stock
analysis;
18.3.8 calculate dividend yield and dividend cover.

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 18.3.9 distinguish between and evaluate the merits of relative valuation models
and absolute valuation models and between historic and prospective
measures of value;;
18.3.10 calculate a basic earnings per share;
18.3.11 explain what is meant by diluted earnings per share;
18.3.12 explain the rationale for the use of the following ratios in equity
valuation:
- price-earnings
- price to book
- price to sales
- price to cash flow
- enterprise value (EV) to earnings before interest tax,
depreciation and amortisation (EBITDA);
18.3.13 calculate price-earnings (both historic and prospective), price to book,
price to sales, price to cash flow ratios for a company;
18.3.14 apply the company ratios in part 18.3.12 above to the valuation of
another given company;
18.3.15 explain the possible shortfalls of using each of these price multiples in
corporate valuation;
18.3.16 explain the basics of Free cash-flow based valuation methods (FCFF,
FCFE) and Residual Income Valuation methods;
18.3.17 define (financial) gearing and evaluate the effect on required equity
returns and thus dividend valuations;
18.3.18 explain the measures of economic value added (EVA) and market
value added (MVA).

Section 18.4: Equity transaction costs

18.4.1 explain and identify transaction costs associated with dealing in UK
equities;
18.4.2 calculate the total transaction costs for an equity transaction, given the
appropriate data;
18.4.3 evaluate the impact of alternative trading platforms, facilitated by MiFiD,
on transaction costs associated with equity dealing.

Section 18.5: Fixed Interest Securities - characteristics

18.5.1 explain the structure and characteristics of the various types of fixed
income instruments issued in the UK including government bonds, index
linked bonds, corporate bonds and Eurobonds;
18.5.2 understand the rationale for and risks to the issuer and holder of a
convertible, callable or putable bond;
18.5.3 explain clean (quoted) and dirty pricing;
18.5.4 understand the valuation methodology for fixed income securities;
18.5.5 calculate the price of a fixed income security given its maturity, coupon
and yield.

Section 18.6 Fixed Interest Securities - risk and return

18.6.1 identify the components of return of fixed income securities;
18.6.2 explain the main risks faced by bond holders and how these risks can be
addressed;
18.6.3 explain the two components of interest rate risk (price and reinvestment
risk);

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 18.6.4 explain the nature of the relationship between yield and price;
18.6.5 analyse the factors that affect the sensitivity of a bond’s price to a change
in required yield;
18.6.6 define and calculate the (Macaulay) duration of a bond;
18.6.7 define and calculate the modified duration of a bond;
18.6.8 calculate, given the duration of a bond, the change in price given a
change in required yield;
18.6.9 explain the convexity error that arises from using duration to estimate a
change in bond price using duration;
18.6.10 define credit risk as it affects bonds;
18.6.11 explain the role of the major credit rating agencies;
18.6.12 interpret the key classes of rating on the scales published by the
major rating agencies;
18.6.13 explain the concept of debt seniority;
18.6.14 identify key features and financial ratios considered by credit
rating agencies in conducting a corporate rating.

Section 18.7: Fixed Interest Securities - yields and the yield curve
18.7.1 define and calculate:
- flat yield
- gross redemption yield (GRY)
- net redemption yield (NRY)
- grossed-up NRY;
18.7.2 explain when each of the above measures may be appropriate to use;
18.7.3 define the yield curve;
18.7.4 explain the theories that contribute to explaining the shape of the yield
curve;
18.7.5 define forward and spot interest rates;
18.7.6 explain the relationship between forward rates, spot rates and the GRY.

Section 18.8: Fixed Interest Securities - transaction costs

18.8.1 explain and identify transaction costs associated with dealing in UK fixed
interest securities;
18.8.2 calculate the total transaction costs for a fixed interest security
transaction, given the appropriate data;
18.8.3 contrast trading methods for fixed interest securities with equities and
examine the impact on trading costs.

Section 18.9: Property

18.9.1 distinguish between the commercial and residential property markets;
18.9.2 understand the rationale for investing in property;
18.9.3 identify the main investors in the commercial property market and the
characteristics of the principal commercial property sectors;
18.9.4 explain how the direct commercial property market works with regard to:
ownership and lease structures; buying and selling; costs, the valuation
of property and investment performance measurement;
18.9.5 identify the risks associated with property investment, both direct and
indirect;
18.9.6 explain the routes to indirect property investment;
18.9.7 identify the transaction costs associated with property investment.

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 Section 18.10: Cash and Cash Equivalents
18.10.1 plain the main characteristics and risks associated with cash deposits
and money market instruments (Treasury Bills, CDs, CP, FRNs);
18.10.2 calculate the discount and quoted yield on a UK Treasury Bill.

Section 18.11: Alternative Investments

18.11.1 explain the characteristics of the main commodity derivatives, including,
energy, softs/biofuels, metals, emissions, weather;
18.11.2 identify the main commodity derivative indices, including GSCI, DJAIG
and RICI;
18.11.3 explain how commodity exposure can be viewed as a hedge against
inflation and ‘event’ risk;
18.11.4 understand the role of the Investment Property Databank indices in the
market;
18.11.5 explain the advantages and risks of investing in ‘alternative’
investments, including gold and antiques.

Section 18.12: Correlation between asset classes

18.12.1 identify the correlation between the various asset classes (equity, fixed
interest, property, cash and alternative investments) and explain its relevance to
asset allocation;
18.12.2 explain the limitations of correlation analysis in extreme market
conditions.

Section 18.13: Pricing, liquidity and fair value

18.13.1 explain the relationship between pricing, liquidity and fair value for the
asset classes of equity, fixed interest, property, cash and alternative
investments.

Topic 19: Investment Products

Demonstrate an ability to analyse the characteristics, inherent risks, behaviours and
relevant tax considerations of investment products
19.1.1 compare and contrast investing through direct investments in securities
and assets compared with investing through indirect investments;
19.1.2 distinguish between open and closed ended funds;
19.1.3 distinguish the features, risks and benefits of unit trusts, investment trusts
and open-ended investment companies;
19.1.4 explain the additional benefits and risks of investing in split capital
investment trusts;
19.1.5 explain the key features and objectives of Exchange Traded Funds
(ETFs) and Exchange Traded Commodities (ETCs);
19.1.6 explain the key features and objectives of Venture Capital Trusts and
Enterprise Investment Schemes;
19.1.7 explain the features and objectives of
- private client funds.
- hedge funds and funds of hedge funds
- structured products
- wrap and other platforms;

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 19.1.8 identify the characteristics and advantages of Individual Savings
Accounts (ISAs), Child Trust Funds (CTFs), National Savings and
Investments, Life assurance based investments and Defined
Contribution pension arrangements.

Topic 20: Derivatives and Other Instruments

Demonstrate an ability to analyse the characteristics, inherent risks of Derivatives and
Other Instruments

Section 20.1: Derivatives

20.1.1 distinguish between forwards, futures and options;
20.1.2 explain the nature, trading and settlement of exchange traded derivatives;
20.1.3 understand the motive for using a futures contract rather than a trade in
the underlying asset;
20.1.4 explain the nature of, and reasoning behind, a contango and
backwardation market;
20.1.5 define the ‘basis’ of a futures contract;
20.1.6 know the contract specifications of the following NYSE Liffe contracts:
- short term interest rate (STIR) futures
- long Gilt futures
- FTSE 100 futures;
20.1.7 explain the possible uses of the above contracts in an investment
management context;
20.1.8 understand the concept of index arbitrage;
20.1.9 distinguish between American style and European style options;
20.1.10 explain time value and intrinsic value relating to an option premium;
20.1.11 identify when an option is in-the-money, out-of-the-money, or at-the
money;
20.1.12 calculate the time value of an option, given the premium, strike price
and current market price;
20.1.13 explain the factors that determine the premium of an option;
20.1.14 calculate the maximum profit, maximum loss and the motivation behind
the following option strategies:
- long and short call
- long and short put
- long and short straddle
- long and short strangle
- long and short butterfly
- covered call and protective put
20.1.15 explain the use of futures and options in hedging an equity portfolio;
20.1.16 calculate the number of FTSE 100 futures or options contracts required
to hedge a portfolio with a specified beta value.

Section 20.2: Selling short, Stock Lending and Contracts for Differences
(Swaps)
20.2.1 explain the mechanics and uses of short selling;
20.2.2 explain the role of stock lending in the markets, and the benefits to the
participants;
20.2.3 explain the nature of contracts for differences;

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 20.2.4 explain the nature of, and motivations behind:
- interest rate swaps
- currency swaps
- equity swaps
- inflation swaps.

Section 20.3: Convertibles and Warrants

20.3.1 explain the nature of convertible bonds and convertible preference
shares;
20.3.2 calculate a conversion price, value and premium;
20.3.3 explain the component parts of the valuation of a convertible bond
(namely straight bond value, call option value, dilution effect and
conversion ratio);
20.3.4 define a warrant;
20.3.5 distinguish between a warrant and a call option;
20.3.6 explain the key features of covered warrants.

Section 20.4: Credit derivatives

20.4.1 explain the purpose mechanics and implications of a credit default swap
(CDS);
20.4.2 explain the risks to the financial system resulting from the proliferation of
credit derivatives.

Topic 21: Investment Theories and Models

Demonstrate an understanding of the merits and limitations of the main investment
theories

Section 22.1: Risk and Return and the Importance of Diversification

21.1.1 explain the ‘normal’ trade-off between risk and return and the concept of
‘dominance’ between investment strategies;
21.1.2 explain the implications of assuming returns are normally distributed;
21.1.3 explain the importance of risk-measurement in the analysis of
investments, and why ex-ante and ex-post measures of risk may be
very different;
21.1.4 identify the commonly used measures of risk in investment analysis and
fund management;
21.1.5 explain the shortfalls of standard deviation as a measure of investment
risk;
21.1.6 explain the meaning of drawdown as a measure of risk;
21.1.7 understand the impact on changing levels of price volatility over time and
how this affects predictions such as tracking error and downside risk;
21.1.8 understand the importance of correlation in constructing efficient
portfolios and the difficulties, limitations and meaning of correlation
coefficients;
21.1.9 calculate correlation coefficients from standard deviation/covariance of
two investments;
21.1.10 explain diversification and its role in constructing efficient portfolios and
its limitations during extreme market conditions;

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 21.1.11 explain the meaning of Value at Risk (VaR) and its advantages and
disadvantages for risk management;
21.1.12 analyse and explain other types of investment risk including inflation,
currency, interest rate, fraud and counterparty risk.

Section 21.2: Models of Return and Risk

21.2.1 explain the concept of investments being exposed to a number of
common factors which partially explain their return and risk profile
(“arbitrage pricing theory”);
21.2.2 identify the assumptions behind the single-factor Capital Asset Pricing
Model (CAPM) and identify other factors in common use;
21.2.3 explain the limitations of the CAPM model;
21.2.4 define the segmentation of risk into systematic (factor) risk and
unsystematic (“investment specific") risk;
21.2.5 calculate the total risk given some systematic and unsystematic
components;
21.2.6 calculate the expected return on a security by applying the CAPM through
interpreting the beta of a security;
21.2.7 explain how the beta may be derived from a scatter chart of historic
returns;
21.2.8 calculate the beta of an investment given the systematic risk of the
investment and the risk of the market;
21.2.9 calculate the beta of an investment given the variance of the market
return, and the covariance of the investment return with the market
return;
21.2.10 calculate the beta of a portfolio given the component betas and the
investment weightings;
21.2.11 explain how different asset class returns may be related, for example
Merton models relating fixed income risk to equity.

Section 21.3: The Efficient Markets Hypothesis (EMH) and Behavioural

Finance
21.3.1 explain the key concepts of the EMH;
21.3.2 explain the limitations of the EMH;
21.3.3 explain the basic concepts of the behavioural finance school of thought
including heuristics and framing;
21.3.4 evaluate the evidence on market anomalies in relation to both EMH and
behavioural finance interpretations.

Topic 22: Investment Management Principles

Demonstrate an understanding of the principles of investment management

Section 22.1: Investment Management Principles – fixed income

22.1.1 explain the following bond portfolio management techniques:
- cash matching /dedication
- immunisation
- contingent immunisation
- anomaly switches

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 - policy switches
- credit risk management
- riding the yield curve;
22.1.2 calculate the theoretical gain from riding the yield curve;
22.1.3 calculate duration for a bond portfolio;
22.1.4 explain the benefits and risks of using barbell and bond portfolio
strategies.

Section 22.2: Fund management styles

22.2.1 distinguish between a ‘top-down’ and ‘bottom-up’ approach to fund
management;
22.2.2 distinguish between active and passive fund management and explain the
costs/benefits to the investor;
22.2.3 distinguish between strategic and tactical asset allocation;
22.2.4 explain the major investment styles prevalent in the fund management
industry (including socially responsible investing – SRI).

Section 22.3: Liability driven investment (LDI)

22.3.1 explain the benefits and risks of an LDI strategy;
22.3.2 explain the process of a liability driven investment strategy;
22.3.3 evaluate some of the techniques used in LDI;
22.3.4 explain the use of basic measures of risk used in LDI.

Topic 23: Investment Performance Measurement

Demonstrate an understanding of the principles of investment performance
measurement

Section 23.1: Total return and its Components

23.1.1 explain the importance of returns analysis in the portfolio management
process;
23.1.2 identify the components of total return for a bond or equity portfolio;
23.1.3 calculate the income, capital and total return over a single period for an
equity or bond portfolio;
23.1.4 calculate the reinvestment return on income over a specified investment
horizon;
23.1.5 explain how returns are decomposed for different asset classes such as
equities (sector/stock/interaction effect) and fixed income
(shift/twist/spread return).

Section 23.2: Money weighted and time weighted returns

23.2.1 identify the data requirements to calculate a
- money weighted return; and
- time weighted return;
23.2.2 calculate respectively, from such data, the
- money weighted return; or
- time weighted return;
23.2.3 interpret time-weighted and money-weighted returns.

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 Section 23.3: Choosing a benchmark, comparisons with investment
objectives, base portfolio, indices
23.3.1 explain the purpose of benchmarking;
23.3.2 identify the characteristics of an appropriate benchmark;
23.3.3 identify the key types of benchmark used in the investment management
industry;
23.3.4 explain how to construct a benchmark portfolio comprising global equities;

Section 23.4: Performance measurement including risk adjusted returns

23.4.1 explain the importance of risk analysis in performance evaluation;
23.4.2 explain and interpret the following risk adjusted measures of return:
- the Sharpe measure;
- the Treynor measure;
- the information ratio;
- Jensen’s alpha;
23.4.3 calculate the Sharpe, Treynor, information ratio and Jensen measure;
23.4.4 explain how total return can be decomposed into the following:
- risk-free return
- return due to choice of benchmark
- return due to market timing
- return to diversifiable risk
- pure selectivity;
23.4.5 explain tracking error and its limitations.

Topic 24: The Macro-economic environment

Demonstrate an understanding of the macro-economic environment and its impact on
investment.

Section 24.1 The macro-economic environment

24.1.1 identify the main long term UK and global socio-economic trends;
24.1.2 identify key economic indicators and explain their trends;
24.1.3 understand the relationship between and importance of the main World
economies;
24.1.4 explain economic and financial cycles including their predictability and
regional differences;
24.1.5 identify international differences in consumption, credit and savings

Section 24.2 Determination of National Income, the circular flow of income,

consumption, the multiplier, the paradox of thrift, foreign trade and income
determination
24.2.1 distinguish between GDP and GNP;
24.2.2 explain the difference between real and nominal GDP;
24.2.3 explain the components of the circular flow of income;
24.2.4 distinguish between injections into, and withdrawals from (‘leakages’) the
circular flow;
24.2.5 distinguish between national income and GNP;
24.2.6 distinguish between classical economics and the Keynesian and
Monetarist schools of thought;
24.2.7 explain the major components of the Keynesian model;

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 24.2.8 explain Keynesian equilibrium;
24.2.9 calculate the Keynesian multiplier given the marginal propensity to
consume (mpc) or propensities to withdraw (tax, import and save);
24.2.10 explain the paradox of thrift.

Section 24.3: Inflation, Unemployment, Fiscal and Monetary Policy and the
role of Central Banks
24.3.1 describe fiscal policy and its influence on aggregate demand;
24.3.2 explain the role of debt in the business cycle;
24.3.3 explain the problems associated with fiscal policy;
24.3.4 define money supply (from ‘narrow’ through to ‘wide’);
24.3.5 describe the fractional reserve banking system;
24.3.6 define the money multiplier and identify its determinants;
24.3.7 calculate the potential money multiplier given a cash reserve ratio;
24.3.8 explain the transmission mechanism whereby monetary policy influences
economic aggregates;
24.3.9 define inflation and explain how it is measured in the UK;
24.3.10 define unemployment and explain how it is measured in the UK;
24.3.11 explain the relationship between inflation and unemployment;
24.3.12 explain how inflation targeting operates in the UK;
24.3.13 distinguish between the different approaches to the control of
inflation taken by the major central banks;
24.3.14 explain the other tools (including Quantitative Easing (QE)) used
by central banks to manage the economy and in particular inflation;
24.3.15 explain the impact of bank capital and liquidity requirements and
the move towards macroprudential regulation on the macro-economy;
24.3.16 explain the role of securitisation on credit growth and the wider
macro-economy.

Section 24.4: The foreign exchange market, government policy and

exchange rates, fixed floating and managed exchange rates, and the
balance of payments
24.4.1 explain how changes in supply and demand for a currency will affect its
value on the foreign exchange markets;
24.4.2 identify the key components of the balance of payments;
24.4.3 explain the relationship between the supply and demand for a currency
and the underlying transactions represented in the balance of payments;
24.4.4 distinguish between a fixed, floating and a managed exchange rate (‘dirty-
floating’ regime);
24.4.5 explain the economic benefits and costs of a fixed exchange rate
mechanism;
24.4.6 explain the implications of persistent global imbalances of trade and
capital;
24.4.7 explain the notion of purchasing power parity as a forecasting tool for
exchange rates;
24.4.8 explain the effectiveness of monetary and fiscal policy in fixed and
floating exchange rate regimes;
24.4.9 understand the nature and basic operations of the foreign exchange
market;
24.4.10 explain the nature of exchange rate risk and how it can be
managed;

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 24.4.11 explain spot and forward exchange rates;
24.4.12 calculate forward rates using interest rate parity (IRP);
24.4.13 explain the concept of purchasing power parity (PPP);
24.4.14 distinguish between IRP and PPP;
24.4.15 explain the International Fisher effect.

Topic 25: Micro-economics

Demonstrate an understanding of micro-economics

Section 25.1: Demand and supply

25.1.1 explain the laws of supply and demand;
25.1.2 distinguish between movements along demand and supply schedules
and shifts thereof;
25.1.3 identify the factors that cause a demand or supply schedule to shift;
25.1.4 describe, calculate and interpret own price elasticity of demand and its
impact on total revenues;
25.1.5 identify the factors that determine own price elasticity of demand;
25.1.6 explain, calculate and interpret the concept of cross elasticity of demand
(as applied to substitute and complementary goods);
25.1.7 explain, calculate and interpret elasticity of supply and its dependence
on the flexibility of factors of production.

Section 25.2: The costs of production; marginal costs, average costs and
total costs
25.2.1 distinguish between explicit (accounting) costs and opportunity
(economic) costs;
25.2.2 explain the concept of normal, supernormal and sub-normal levels of
profit;
25.2.3 define fixed costs, variable costs, marginal costs, total costs and
average costs;
25.2.4 explain the shapes of the short-run marginal cost, average variable
cost, average fixed cost, and average total cost curves;
25.2.5 explain the law of diminishing marginal returns and its impact on the
shape of short-run cost curves;
25.2.6 explain the relationship between total revenue, average revenue and
marginal revenues for a normal demand schedule;
25.2.7 explain the relationship between marginal cost and marginal revenue
and how this determines the profit maximising level of output for a firm.

Section 25.3: Short and long run costs, economies and diseconomies of
scale
25.3.1 define short-run and long-run in the context of cost behaviour;
25.3.2 explain the notions of economies of scale, a minimum efficient scale
and diseconomies of scale and their impact on the shape of the long-
run average cost curve;
25.3.3 explain the relationship between long run marginal costs and long run
average costs and explain how this determines the level of output for
productive efficiency to arise.

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 Section 25.4: Perfect competition and monopoly
25.4.1 identify the conditions that characterise a perfectly competitive (‘price-
taker’) market;
25.4.2 explain the conditions of long-run equilibrium for a price-taker;
25.4.3 explain the market mechanics through which only normal levels of profit
can be earned by price takers in the long-run;
25.4.4 explain the relationship between short run supply and marginal cost for
a price-taker;
25.4.5 describe the shape of the long run supply curve for a perfectly
competitive industry;
25.4.6 explain the decision by a price taker facing economic losses to either
continue to operate or shut down;
25.4.7 identify the conditions that characterise a pure monopoly;
25.4.8 explain the conditions of long run equilibrium for a monopoly;
25.4.9 distinguish between the equilibrium price, output levels, and productive
efficiency of a monopoly compared to a perfectly competitive firm;
25.4.10 explain price discrimination and the conditions under which it will
prevail.

Section 25.5: Commonly used methods of assessing industries/companies

25.5.1 understand how business cycles may affect relative industry
performance;
25.5.2 explain Porter’s five competitive forces that drive industry competition;
25.5.3 explain the product life cycle and the characteristics of each phase
(introduction, growth, maturity and decline);
25.5.4 explain the concept of strengths, weaknesses, opportunities and threats
(SWOT) analysis and its role in corporate evaluation;
25.5.5 explain the 4Ps marketing mix (product, price, promotion and place) in
the context of analysing competitive advantage and threats.

Topic 26: Statistics and Financial Mathematics

Demonstrate an ability to apply statistical and financial mathematics techniques

Section 26.1: Sources of Data

26.1.1 distinguish between primary and secondary sources of data;
26.1.2 identify examples of primary and secondary data;
26.1.3 distinguish between a population and a sample;
26.1.4 explain the key sampling methods;
26.1.5 distinguish between continuous and discrete data;
26.1.6 define categorical data and explain how it can be converted to ordinal
data;
26.1.7 interpret a frequency and relative frequency distribution;
26.1.8 explain the use of the following in the presentation of data:
- Lorenz curve
- pie chart
- bar chart
- histogram

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 - scatter plots
- graphs.

Section 26.2: Summary Data

26.2.1 define, explain and calculate the following measures of central tendency
for both raw data and interval data:
- arithmetic mean
- geometric mean
- median
- mode
26.2.2 distinguish between symmetric and skewed data;
26.2.3 explain the relationship between the mean, median and mode for
symmetric and skewed data;
26.2.4 define, explain and calculate the following measures of dispersion for
both raw data and interval data:
- standard deviation (population and sample)
- variance
- range
- quartiles and percentiles
- inter-quartile range;
26.2.5 explain the notion of statistical significance in the context of investment
decisions.

Section 26.3: Correlation and bivariate linear regression

26.3.1 explain the least-squares regression technique in deriving a line of best
fit;
26.3.2 distinguish between the dependent and independent variable;
26.3.3 interpret the intercept and gradient components of a regression line;
26.3.4 calculate a forecast value for the dependent variable given the regression
line equation;
26.3.5 explain and interpret the correlation coefficient in the context of linear
regression;
26.3.6 explain the shortfalls in the application of linear regression to forecasting
including correlation does not imply causation and the pitfalls of data-
mining;
26.3.7 explain the concept of autocorrelation and appreciate the impact of
extreme events on correlation

Section 26.4: Index numbers

26.4.1 explain the purpose of an index value;
26.4.2 calculate an index level for the current year, given the base year data and
the current year data;
26.4.3 explain the role of financial market indices in fund management;
26.4.4 explain and calculate a price relative for a share;
26.4.5 calculate and interpret a simple arithmetic index;
26.4.6 calculate an index level having re-based the index series;
26.4.7 calculate and interpret a geometric index;
26.4.8 calculate and interpret a market value weighted index;
26.4.9 understand the composition and construction of key global bond and
equity market indices;
26.4.10 explain the relevance of free-floating indices.

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 Section 26.5: Simple and compound interest
26.5.1 distinguish simple interest from compound interest;
26.5.2 calculate simple and compound interest over multiple periods;
26.5.3 distinguish a nominal (simple) annual interest rate from an effective
(compound) annual rate;
26.5.4 calculate the annual compound rate given the nominal rate and the
frequency of compounding;
26.5.5 calculate the annual nominal rate of interest given the annual compound
rate and the frequency of compounding;
26.5.6 explain the concept of continuous compounding;
26.5.7 calculate the effective continuously compounded rate given the nominal
rate.

Section 26.6: The time value of money - present and future value
calculations, annuities, perpetuities, and mortgages
26.6.1 calculate and interpret future values for:
- single sums
- annuities;
26.6.2 calculate and interpret present values for:
- single sums
- annuities
- perpetuities;
26.6.3 calculate equal instalments on a repayment mortgage given the present
value of the borrowings, the fixed mortgage rate and the term of the
borrowing.

Section 26.7: The internal rate of return and net present value
26.7.1 calculate and interpret the net present value of a series of investment
cash flows;
26.7.2 calculate and interpret an internal rate of return;
26.7.3 explain how NPVs and IRRs can be used in investment decision making;
26.7.4 explain the limitations of each technique;
26.7.5 explain why decisions using each technique may conflict;
26.7.6 explain the scenarios in which multiple IRRs may occur.

Topic 27: Accounting

Demonstrate an understanding of accounting principles
Section 27.1: Fundamental Precepts
27.1.1 explain the legal requirement to prepare financial statements;

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 27.1.2 explain the concept of a company being a separate legal entity, and the
purpose of the preparation of the accounts;
27.1.3 define ‘small companies’ for the purpose of financial statement
preparation and explain the relevance of this definition;
27.1.4 explain when accounts may be required to be prepared under IFRSs
rather than UK GAAP;
27.1.5 explain the function of the
- Financial Reporting Council
- Accounting Standards Board
- Financial Reporting Review Panel; and
- the Urgent Issues Task Force;
27.1.6 explain the function of:
- The International Accounting Standards Board
- The International Financial Reporting interpretations
Committee;
27.1.7 explain the nature of:
- Statements of Standard Accounting Practice (SSAPs);
- Financial Reporting Standards (FRSs);
- Statements of Recommended Practice (SORPs); and
- Urgent Issues Task Force (UITF) abstracts;
27.1.8 explain the nature of:
- International Financial Reporting Standards
- International Accounting Standards
- IFRIC interpretations
- SIC interpretations;
27.1.9 identify additional disclosures required in the financial statements for LSE
listed companies;
27.1.10 explain the role of the auditor;
27.1.11 identify, in outline, the reasons for auditors issuing a qualified
report.

Section 27.2: The Balance Sheet

27.2.1 explain the purpose of a balance sheet;
27.2.2 identify and explain the key balance sheet categories and content;
27.2.3 distinguish between capital and revenue expenditure;
27.2.4 explain the valuation of non-current assets;
27.2.5 calculate depreciation under the straight-line and reducing balance
methods;
27.2.6 calculate the profit or loss on disposal of a non-current asset;
27.2.7 explain the principles behind the valuation of inventories;
27.2.8 explain the effects of first-in-first-out and last-in-first-out valuations on
inventory values and profits;
27.2.9 dentify the types of current and non-current liabilities that typically appear
in financial statements;
27.2.10 explain the concept of a provision;
27.2.11 explain the treatment of contingent liabilities within financial statements;
27.2.12 explain the treatment of pension costs in financial statements;
27.2.13 explain what is meant by a post-balance sheet event;
27.2.14 distinguish among authorised, issued, paid up and called up share
capital;
27.2.15 explain the effect of the following on a balance sheet:

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 - rights issue
- bonus/scrip issue
- stock split
- share repurchases;
27.2.16 identify and explain the main types of reserve found in the balance
sheet.

Section 27.3: The accounting treatment of financial instruments

27.3.1 identify the various classifications of financial instrument and outline the
accounting treatment of each.

Section 27.4: The Income Statement and Statement of Changes in Equity

27.4.1 identify and explain the classification of expenses based on nature or
function;
27.4.2 explain the principle of revenue recognition;
27.4.3 identify the following different levels of profit and understand which
classes of expenses are considered in arriving at each level:
- gross profit;
- trading (or operating) profit; and
- net profit;
27.4.4 explain the objective of a statement of changes in equity;
27.4.5 identify the information to be reported in a statement of change in equity.

Section 27.5: The Cash Flow Statement

27.5.1 explain the purpose of a cash flow statement;
27.5.2 identify the classification of cash flow activities;
27.5.3 calculate net cash flow from operations given operating profit (or vice
versa) and the relevant balance sheet movements.

Section 27.6: Group Accounts

27.6.1 define and distinguish between corporate investments, associated
companies and subsidiaries;
27.6.2 explain the purpose of group accounts;
27.6.3 define a minority interest and explain how it is represented in the financial
statements;
27.6.4 explain how goodwill arises in acquisition accounting;
27.6.5 explain the treatment of goodwill and intangible assets in the group
accounts, including amortisation, useful lives and the requirement for
impairment reviews.

Section 27.7 Major Accounting Ratios

27.7.1 distinguish between profitability, liquidity, and gearing ratios;
27.7.2 define and calculate return on capital employed;
27.7.3 define and calculate return on equity;
27.7.4 explain how return on capital employed can be broken down into profit
margin and asset turnover;
27.7.5 define, calculate and interpret
- operational gearing
- financial gearing
- the current ratio

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 - the quick ratio (acid test);
27.7.6 explain the effect of the following on the major accounting ratios:
- rights issue
- bonus/scrip issue
- stock split
- share repurchases.

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