FASEA Financial Analysis and Reporting 2 — Questions and Answers
Question 1: Under AASB 15, revenue from a financial planning fee charged upfront for a 12-month advice engagement should be recognised:
- Entirely at the point of payment receipt
- Ratably over the 12-month service period (Correct answer)
- Only when the Statement of Advice is delivered
- When the client signs the engagement letter
Correct answer: Ratably over the 12-month service period
AASB 15 requires revenue to be recognised as performance obligations are satisfied, so a 12-month retainer is spread over the service period.
Question 2: A financial adviser reviews a client's portfolio and notices the P/E ratio of a held stock has risen from 15x to 45x while earnings have stagnated. This most likely signals:
- Improved earnings quality
- Potential overvaluation requiring investigation (Correct answer)
- A buy signal due to market confidence
- Undervaluation relative to peers
Correct answer: Potential overvaluation requiring investigation
A P/E expansion without earnings growth suggests the market has priced in future growth that may not materialise, indicating possible overvaluation.
Question 3: Which financial statement item would an adviser examine to assess whether a company can meet its short-term obligations without selling inventory?
- Debt-to-equity ratio
- Quick (acid-test) ratio (Correct answer)
- Return on assets
- Operating cash flow margin
Correct answer: Quick (acid-test) ratio
The quick ratio excludes inventory from current assets, measuring a firm's ability to cover short-term liabilities with its most liquid assets.
Question 4: When comparing managed fund performance, an adviser should prefer the time-weighted return (TWR) over money-weighted return (MWR) because TWR:
- Includes the impact of client cash flows on returns
- Eliminates the distorting effect of client-controlled cash flows (Correct answer)
- Always produces a higher return figure
- Is required by FASEA for client reporting
Correct answer: Eliminates the distorting effect of client-controlled cash flows
TWR neutralises the timing of investor cash flows, making it the appropriate measure for comparing investment manager skill across funds.
Question 5: A client holds a bond purchased at a premium. As the bond approaches maturity, the carrying value on their statement will:
- Rise toward face value
- Fall toward face value (Correct answer)
- Remain constant at the purchase price
- Fluctuate based on current interest rates only
Correct answer: Fall toward face value
Premium amortisation under the effective interest method reduces the carrying value of a bond purchased above par toward its face value at maturity.
Question 6: ASIC Regulatory Guide 175 requires that a financial product advice record (Statement of Advice) must include:
- A full audit report of the client's finances
- The basis for the advice and the adviser's remuneration (Correct answer)
- The client's tax file number for verification
- A comparison of at least five competing products
Correct answer: The basis for the advice and the adviser's remuneration
RG 175 mandates disclosure of the advice rationale and all remuneration, conflicts of interest, and associations relevant to the advice.
Question 7: An adviser calculates a client's net worth as $850,000 in assets minus $320,000 in liabilities. This figure is derived from the client's:
- Cash flow statement
- Statement of financial position (balance sheet) (Correct answer)
- Income statement
- Statement of changes in equity
Correct answer: Statement of financial position (balance sheet)
The personal balance sheet (statement of financial position) lists assets and liabilities; the difference is the client's net worth.
FASEA Financial Analysis and Reporting 2
Under AASB 15, revenue from a financial planning fee charged upfront for a 12-month advice engagement should be recognised: