The Broader Picture vs Details

Throughout my preparation for Level II, I was of the impression that it is totally different than Level I in terms of understanding, depth and testing. After going through the exam I realized LII is different in terms of understanding and depth but in a lot of areas I had found the testing to be more or less on the same path. I don't know how true I am in exclaiming this but this is exactly my impression. Understanding the broader picture is undoubtedly necessary but it is also deceiving in terms of exams point of view. For instance I spent a lot of time in understanding and solving fairly detailed examples forgetting that an MCQ has three options and we have around 3 minutes to solve it. Steps which are involved in broader applications need to be understand fairly and can be tested in the exam. Like in translating the whole Financial Statements in Multi National Operations using Temporal or All current method several steps were involved. Considering the examples provided in the chapter I went through the whole process but lately I realized that the whole situation is less likely to be tested as compared to individual steps like how to translate revenues, COGS etc. or how using one method is different that other in terms of ratio analysis and so on. Trying to grasp the whole topic may lead one, as what happened with me initially, not to remember and recall individual steps which have the potential to be tested. I am not stating to let go off the broader picture and cram the steps but understanding as well as making ourselves comfortable with details is important. Thanks to curriculum notes I used, had separated the details and highlighted them in boxes which could be digested easily. Precisely talking about the exam it is very important to stay focused on details and steps which could be tested along with proper understanding of the topics particularly in all major areas.

The Schedule I followed for Level II

For Level II I had followed the schedule provided by FinQuiz. By last year they were offering for free.. I think the offer still resides, one can get it in response to a one liner email at info@finquiz.com

Mergers & Acquisitions - Some definitions

• Acquisitions: purchase of some portion of one company.
• Merger: absorption of one company by other.
• Statuary merger: acquirer acquires all target’s assets.
• Subsidiary merger: target becomes subsidiary after purchase.
• Consolidation: both cease to exist to become a new company.
• Target Company: one being acquired.
• Acquiring company: company acquiring target.
• Hostile transaction: potential business combinations without management & board’s consent.
• Friendly transaction: business combinations approved by management of both companies.
• Horizontal merger: merging companies in same kind of business.
• Vertical merger: companies at different position in same value chain.
• Backward integration: acquirer purchases target ahead of it in value chain.
• Forward integration: acquirer purchases target further down the value chain.
• Conglomerate merger: Acquires purchasing target unrelated to its core business.

Effect of Changing Pension Assumptions on Benefit Obligations

Effects On	↑discount rate	↓rate of compensation growth	↑Expected rate of return
PBO	↓	↓	N/A
ABO	↓	N/A	N/A
VBO	↓	N/A	N/A

Practising through Application

Someone close to me told me that learning through application of CFA knowledge from the real world can help in better understanding of the topics. Initially I didn't realize its importance but after watching myself during the exam connecting topics with news headlines and other bloomberg articles, I can understand its significance. The first three readings of fixed income require understanding and a bit more practice but the last three readings require in depth understanding of MBS, ABS and their valuation. Retaining tranching, CDOs, CMOs, their structures etc. is a tough job. Reading about these instruments more over the internet especially articles and news related to these helps in connecting the topics with the real world happenings. It improves the ability to retain and recall. It worked for me remarkable trying that can also help you...

PS: I have also mentioned several news items related to Fixed Income and Derivatives over this blog. You can check them through the labels.

Changes in the CFA Level II Curriculum from 2012 to 2013

• Readings have been reduced from 64 to 56
• Employee Compensation, Important FRA reading, has some revisions
• Economics has been revamped to three readings i.e. Currency Exchange Rate Determination & Forecasting, Economic Growth & Investment Decision, & Economic of Regulation
• A Note to Asset Valuation, Industry Analysis, & Valuation in Emerging Markets have been deleted in Equity
• Alternatives first two readings have been replaced with Private Real Estate Investments & Publicly Traded Real Estate Securities
• Fixed Income reading General Principles of Credit Analysis has been replaced with Fundamental of Credit Analysis
• Using Derivatives to Enhance Return & Manage Risk has been replaced with Credit Derivatives: An Overview.
• Two Portfolio Management Readings, A Note on Harry Markowitz’s Market Efficiency and International Asset Pricing, have been deleted.
• Corporate Finance, Quantitative Methods & Ethics are the same

When I started off Preparing for Level II.

Last Year in September 2011 I started off preparing for Level II. The first area to cover was Fixed Income, as it was in Level I in January 2011. Fixed Income was covered in 6 readings i.e. 48,49,50,51,52,53. Initially 48,49, and 50 were covered as they were relatively easy. Reading 48 had some tricky areas which had the potential of being tested. Important for me were the cash flow analysis and the ratios which cleared when I completed with Equity especially readings related to FCFs. Immense information is found in these readings and firm grasp over these areas is a must not only with understanding and commanding perspective but also with respect to exams perspective. Almost two weeks were spent on these three readings. Reading 49 related to term structure and key rate duration was not that much difficult for me. I found reading 48 quite detailed and reading 50 interesting. Developing the binomial tree to value a bond with embedded option was a very learning experience. Although how volatility is implied or put into the tree actually in the real world remained a mystery, which I certainly will look into now, but on the whole it was interesting and required a lot of practice. These three readings were not that much difficult as compared to the other study session covering Fixed Income. A fair overview of how in depth Level II could be was considerably experienced by me during first two weeks. People claiming that CFA actually starts from Level II was something in my mind seemingly coming true! I was initially worried but never gave up. May be that's the reason why I have passed this exam...

Level II Story - 1st Episode

The purpose of writing this series of posts is to provide a narrative of last 8 to 9 months. How I started off with the preparations of Level II. What I had in mind before initiating my preparations. The routine I followed. The material I used. The tests I appeared in. The way I perceived things and what aided to the success. The value of success can not be imagined by me as I've passed in the first attempt. The vigour can be asked by those who unfortunately have failed after putting in all the efforts throughout the year. This is the first post of the series. I'll be sharing the whole stuff in a series.

Stay Tuned.

Shit happens but Life moves on...

The greatest all-rounder in 150 years cricket history, Imran Khan, was dropped from the team after he played the first match. He is the only fast bowler in the cricket history to have changed his bowling action and have succeeded. With his career's last match he, as the caption of the team, won the world cup in 1992. So much from the Cricketing Legend. I once heard him saying that you do not deserve to win unless you have the potential to face failure. These words have changed my life. Confidence does shatter after getting failed but only those succeed who manage to build themselves up for another try. It took us all 7 to 8 long months to prepare for the CFA Level II exams, we all put in our best to prepare ourselves for nailing it but what if we fail??? Less than 24 hours left for the result to be announced. Recalling the exam reminds me of the uncertainty I was having while rolling the circles specially in Ethics, & Economics. FRA & Ethics grant me a bit of confidence but one never knows what will happen. Lets hope for the best and be ready for the worst. Like its said... Shit happens but life moves on...

Integrating Financial Statement Analysis

If I compare the exam with the chapter end questions and also with the detailed examples, I think the exam was much more balanced. The technicalities in the examples and chapter end questions are way deeper. Perhaps the purpose is to equip candidates with the desired level of knowledge and skills. Reading curriculum was a tedious job especially for the purpose of passing the exam but going through it like something vital and valuable in terms of knowledge and skills development certainly changes the perspective and makes it a very helpful guide equipped with latest happenings in the financial world and methods of dealing with them. Reading 27 is one such example which has some amazing application of integrating financial statement analysis. Going through this reading after the exam solely for the purpose of learning helps in several ways. 1) There is no time restriction to complete it and 2) The mind is having a converged focus but a broad spectrum to view it. The adjustments, treatments related to several financial issues, altering numbers to reflect true economic position etc. have been explained in that reading. For me it is a must which I should be doing in 2,3 days by going through that reading from a broader spectrum and apply that knowledge on several financial statements to learn & develop myself up. There are other readings as well which serve this purpose but particularly Study Session 7 is remarkable in this regard.

Level II Exam, 3rd June 2012

Finally after several months of 'focused' preparation, the exam went well... As you know under Standard 7A & the Candidate Pledge we aren't allowed to discuss the exam specifically but an opinion regarding general difficulty level can be given. For me the morning session was tough as compared to the evening one. Time wasn't an issue especially in the afternoon part. Ideally 18 minutes per item set are advised but a few took 20 to 25 and a few, I was able to complete in 8 to 10 minutes. As compared to Level I the experience was different in terms of burnout. It was because of the no. of questions as they were 50% less. The areas I was comfortable with enjoyed like nothing else and the areas which I found tricky, I really cursed my self while sitting there.... On the whole it was a good experience in terms of gaining immense knowledge and its application. Over next few days I will be posting about different companies specially applying Reading 27, Integrating Financial Statement Analysis on several companies to keep myself into the stuff.

Am I really scared of failing the exam?
Well Yes! It's a part of life.

Does that mean my all efforts will go in vain?
Certainly Not because of the knowledge & skills I've developed in this one year have paid off!

Will I appear again if I fail?
Obviously!

What are the chances of passing the exam?
Morning Session... 50/50, Evening Session 70/30

Am I excited about the result?
Hell Yea!

Good Luck to all the candidates (including myself) and best wishes for the result..

Keep Visiting.

Exam Day ID Requirements

Perhaps this is the time to check the exam day ID requirements...

http://www.cfainstitute.org/cfaprogram/exams/Pages/exam_day_id_requirements.aspx?intCamp=hompage_banner_ID_policy

Just 2 MCQs...

The value of a single run can be asked from a player who looses his wicket after scoring 99 runs. Same is the case here! I have been practising several mocks and have been able to get score 4/6 in several item sets which end up 66%. In the last mock, which was from CFA Institute, I ended up scoring 70% in the morning and 77% in the evening part. The good thing was I was above 70% but the sad part was not scoring above 70% marks in Equity and FRA. These two are major areas and I was on avg scoring 4/6 marks in them. In 1 item set I did secure 5/6 but the rest were below the mark. Thanks to Economics and Quants where I was able to get 6/6.. Else I would have scored 66% marks. As of now only 5 days have left for the exam my full concentration is on Equity and FRA as it constitutes major weight-age of the exam and I am reviewing the mistakes I have made and  focusing on to correct the 2 MCQs which I am lacking. You see if in morning session 2 item sets are framed from Equity and we end up scoring 7/12 then its 58% while we get 9/12 it constitutes 75% and the tables turn around! Luck is also very important as the syllabus is so vast that grasping it all seems impossible, at least to me. I don't know whether I will be able to pass the exam or not but considering the value addition which I have experienced is immense. Lets hope for the best.

Good Luck!

1st Mock - 4th June 2012

The purpose of appearing in a mock today, month before the exam, was to better gauge myself for the areas which I require more attention and converged focus. Initially I was scared because I wasn't prepared up to the mark but considering the objective of the test I decided to take it as a challenge and put in my best. During those hours I was in a state of dilemma. Compared to Level I certain areas were lightly touched which was pretty helping but that affected adversely in a way that the likelihood of performing well reduced 50%. As in Level I there were 240 questions and in Level II they are 120. Only 1 item set of Ethics in the morning section was indeed encouraging but scoring 5 out of 6 would yield above 70% marks. This was particularly which I lacked in. I mean I did score 62% marks overall which are really encouraging for someone who has 1 month to go and could revise the syllabus multiple times especially when 'equipped' with Curriculum Notes (FinQuiz), as 370 pages and the whole curriculum revised... The thing which I realized heavily today was not getting confident by correcting 3 questions in a row out of 6 in an item set. The rest 3 hold immense importance and being able to correct 5 will certainly yield favourable results. In Equity, FRA, Corporate Finance there is a chance and relatively in these areas the likelihood of correcting most questions is high. A part from that Fixed Income & Ethics also have 2,2 item sets each in both sessions we can score well in them. The rest can be of 1,1 item set. Scoring 4 out of 6 can work well. Any how, to sum up, the experience went well. Precision and Accuracy is required a long with the ability to recall the formulas, concepts timely in the exam. Time wasn't the issue today but doing the question correctly was certainly an issue. The next mock in which I am appearing is 2 weeks ahead. Today's experience has given me a roadmap and have highlighted the areas in which I lack. I hope I'll be able to cope them and perform well in the next mock.

Good Luck!

Got the ticket today...

The examination ticket is available on the CIE website. I got it downloaded today and matched the details with my passport. The ticket is different than it was in the previous year. It reminds me of the days last year when I was preparing for Level I. As compared to that I can certainly experience great deal of addition to my knowledge and so does the exam pressure. This is the moment for me not to bother about result as luck does matter in Level II. Can I fight with that? Well certainly no but will it give me a fair play? I believe yes and I need to give tough time to it. Almost done with first reading except 3,4 LOS. Aiming to revise the whole syllabus at least once. FinQuiz curriculum notes are quite helpful in that regard... 370 pages summing up the whole curriculum and missing nothing. Will be appearing in the mocks after 20th May and share the results. Fingers crossed for Level II exam but the fear is failure is no more. Those who cannot face failure have no right to win! I need to put in my best efforts because they are in my control. What if I fail? Will appear in the Level II exam again and will keep on appearing every year unless I pass. Will failure be another opportunity to learn? Certainly that would be. Am I thinking about the exam result? Nah... will start thinking over it after 3rd June.. At present the full focus is on revising the stuff and making myself better in it.

Good Luck for the Exam.

Converting from LIFO to FIFO

I saw this question posted by someone on a forum.

Due to declining prices, Steffen Inc. has a LIFO reserve of –$20. Its income tax rate is 35%. If an analyst is converting Steffen’s financial statements to a FIFO basis, which of the following adjustments is most likely required?

A)

Increase assets by $20.

B)

Increase shareholders’ equity by $13.

C)

Decrease liabilities by $7.

The interesting thing to note in this question was the negative LIFO Reserve. So far I have been dealing with questions which have positive LIFO Reserves through the ending was less in many instances but the Net value to be negative... I hadn't seen it before. 

When Financial Statements are converted from LIFO basis to FIFO basis there is an imbalance which occurs in the Balance Sheet Equation. As FIFO Inventory = LIFO Inventory + LIFO Reserves, changing the cost flow basis increases the inventory but in this case the LIFO Reserve is negative, the inventory would decrease so A is incorrect.

Since FIFO COGS are less (Under inflationary environment) Reducing them results in higher net profit margins after tax adjustments and so does Retained Earnings. Therefore they increase by the amount = LIFO Reserves x (1-tax rate). In this it is clearly written that the environment is deflationary so converting to FIFO basis the Retained Earnings will increase by -20 x (1-35%) = -13$, effectively decreasing, so B is Incorrect.

Apparently the answer should be C as both A & B have been concluded as wrong. To balance the accounting equation, Liabilities must decrease by amount 20 x tax rate = 7$ as Assets are decreasing by $20, Equity is decreasing by $13 therefore Liabilities must decrease by $7 so C is Correct.

Okay but which liability is gonna decrease? Now this is interesting. I think that deferred tax liabilities accounts for the differences between tax payable and the tax actually paid. If tax payable is higher under some transaction taking place today but not paid then a liability is recorded which will be settled in the future. We know that under LIFO companies report less taxes as LIFO COGS are higher. Changing the cost flow basis to FIFO results in higher tax payable amount and if it is not paid in cash then a liability, deferred tax, is created. However in this case as the LIFO Reserves have become negative, the Deferred tax liability will decrease. The option that any other asset will increase is not provided and apparently the liability which should reduce seems to be Deferred Tax. 

Revision Plan

Initially I had thought of not making a detailed coordinated plan and just start of with areas and decide about the next one after completing the previous one. Intention behind choosing this path was not to put in a lot of energy in planning rather focusing more on actually revising the course. And it went disastrous! Anyhow I have now divided the subjects into two categories. 1. Those which require hard work i.e. immense effort and 2. Those which have either already been practised by my several times like Equity, Fixed Income and Derivatives, or are not more in weight-age like Quantitative Methods. I am simultaneously taking both these categories so that I may not sound less productive by going through two areas simultaneously which are easy or do not freak out by taking two areas which are hard for me. For light areas I am giving 5 days per area and for hard ones I am covering them in 8 days each. Effectively I will be able to go through all the areas by 20th May once and after that in 10 days I will try my best to practice by giving 3 mocks and chapter end questions and revising my weak points. A similar kind of strategy worked for me in Level I and my fingers are crossed this time. Do share if you are working with any strategy of revising and covering the whole stuff.

Good Luck for your exam!

Investment Classification - USGAAP vs IFRS

Knowledge Application - SPE

I just completed reading 22 (Revision) SPE are discussed in last section of this topic. I found this related news item to it.

Read the news item: http://www.independent.ie/business/irish/government-fights-to-keep-nama-debt-off-its-books-3078860.html

Reading 20,21 FRA Impact on several Ratios

Impacts on profitability, liquidity, activity and solvency ratios of finance lease, operating lease, inventory write downs, choice of inventory valuation etc. can be tested highly. While doing the chapter end questions of Reading 20 and 21 (Study Session 5) I encountered several questions framed on ratios. I was having a trouble in solving them but when I sketched in my mind the impact of any accounting choice to the numerator and denominator of the ratios and then tried to figure out the effects, my answers started getting correct. Another important aspect in that regard was the effect of adding the same amount to the numerator and to the denominator. Suppose a company has off balance sheet lease arrangements (operating lease) if it had classified it as finance lease the liabilities to total assets ratio would be higher or lower? This was interesting as the same amount will be added to the asset base and a liability equal to the PV of lease obligation would be created. The numerator and the denominator of the liabilities to total assets ratio will increase with the same amount. This will result in decreasing the ratio not increasing it. The answer therefore is lower. Such concepts, which are present in the chapter end questions, can be tested in the exam. I have made myself comfortable with them today and I hope when I'll be encountered with any question like this, I would be able to connect it with what I experienced today.