My name is Steve Chen, a fellow member of ACCA and course director at APC (www.globalapc.com) teaching ACCA online courses to students from all around the world. This article will explain the topic ‘Direct listing’ in ACCA Advanced Financial Management (AFM) exam.

Direct listing is often known as listing by introduction. This is a choice for private companies to publicly trade their shares without going through the traditional IPO process, ie no need to engage with underwriters; no need to lock shares of original shareholders before they can be sold; shareholders can trade their shares on the first day when company obtains a listing status.

In the traditional IPO process, the share price is set by investors from roadshow which the underwriter and company then determine. However, under direct listing, the price is set by reference to the private valuation and many other factors such as sustained trading in the private market by the stock exchange. Again, human judgement places a vital role in setting the price.

Usually, not every company could use this approach to become listed as many of these companies do not have an easy-to-understand business model and diverse shareholders base. However, workplace chat company Slack and the music streaming service Spotify successfully used this approach to obtain a listing status in the stock exchange.

Case Study – Direct listing requirement from New York Exchange:

A company can qualify for a direct listing with at least 400 round lot (hundreds) holders and:

· a primary capital raise with public market value of at least $100 million or

· a $250 million total public float or a combined aggregate of a primary capital raise and public float of at least $250 million

A company with less than 400 round lot holders can be given a grace period to meet the minimum round lot requirement if it:

· has a public market value of at least $350 million

· does a primary capital raise with a public market value of at least $250 million

· has a combined aggregate of a primary capital raise and public float of at least $350 million

Source: NESE

I hope this article helps regarding the topic of direct listing. I select this topic because many Financial Management students found this topic vague as this topic is not frequently tested in the exam. Therefore, in study text or lectures from other tutors, this topic is not discussed in detail.

In addition to providing ACCA lectures online, I also wrote articles in ACCA AB magazine. Besides, I am the author of four accounting books. If you are interested in studying ACCA courses with me, please visit my website http://www.globalapc.com for further information, where you can find many of my ACCA demo video lectures.

My name is Steve Chen, a fellow member of ACCA and course director at APC (www.globalapc.com) teaching ACCA online courses to students from all around the world. This article will explain the topic ‘Business Model in ACCA Strategic Business Leader (SBL) paper.

Business model means how the business works, and this is quite straightforward. However, in the real-life, there are many ways the business could work to gain revenue. In the exam, it is always important to bear this in mind. When you see an exam question asking you to provide suggestions, you can always think about Business Model as a practical solution or suggestion provided to the examiner.

There are many business models, and in this article, I will explain two common business models.

  1. Free + Premium model

It means business provides free access to basic services with additional fees to be paid if other services to be used. A typical example is the Financial Times (FT) which provides free of charge articles (such as what I did here at ACCA APC www.globalapc.com), and if you want to subscribe to other services such as premium articles in FT, you need to pay.

This is a fantastic way to drive traffic to the business, and from these potential customers, some of them will evenly become paid customers if they find those free-of-charge resources useful. This is a way to perform ‘experiential marketing’ activities.

  1. No frills model

It means that businesses focus on basic items at low price. This is quite common in budget airlines and hotels where only basic service (flight service) is provided and if you want additional services such as food and drinks, you need to pay. This is also common in fast-food restaurants such as McDonald’s as these are standardised restaurants with low prices, unlike high-end restaurants where customers have to be served.

In the SBL exam, do make sure to be practical rather than focus on the theory. Again, in my ACCA SBL course, I will provide you with my own study text with lots of practical examples in there and you can directly apply it them in your SBL exam.

I hope this article helps regarding the topic of business model. In addition to providing ACCA lectures online, I also wrote articles in ACCA AB magazine. Besides, I am the author of four accounting books. If you are interested in studying ACCA courses with me, please visit my website http://www.globalapc.com for further information, where you can find many of my ACCA demo video lectures.

My name is Steve Chen, a fellow member of ACCA and course director at APC (www.globalapc.com) teaching ACCA online courses to students from all around the world. This article will explain the topic ‘strategy’ in ACCA Strategic Business Leader (SBL) paper.

There are many definitions for ‘strategy’. However, in the SBL exam, the examiner is not very interested in testing students the wordy definition. What examiners want is the application of this definition to many cases.

According to Drucker, Strategy is a pattern of activities that seek to achieve the organization's objectives and adapt its scope, resources and operations to environmental changes in the long term. Do you really understand what long-term means? If a business needs to change the strategy, does it really need to take several years before changing?

I often explain to my ACCA students that the answer to this question is to focus on strategy elements to understand better why it may take a while to change the strategy.

Elements in strategy:

l Core activities – Airbnb’s core activity remains in its information technology as it mains strong hosts network.

l Core resources – Coca-Cola’s brand is its core resource.

l Value propositions – Apple states smartphones should be more than a collection of features, ie demonstrate experience (value) to its customers.

l Customer relationships – luxury brands often use ‘dedicated personal assistance’ way to manage customer relationships.

l Channels – Facebook uses online platforms to communicate with customers.

l Customer segments – Alibaba focuses both on B2C and B2B customer segments.

l Cost and revenue structure – Joseph Cheaney & Sons provides handmade shoes with high price – this is also my favourite brand.

l Key stakeholders – Gucci gives products to bloggers (influencers) to promote their products.

As you can see from the above list with practical examples, you may notice if a business needs to change the strategy, ie changing the revenue structure from low price to high price, it also needs to change the core activity such as procurement and operation activities, value propositions and channels. This could not be done on a stand alone basis but everything is linked together.

In my SBL course, you will learn many practical examples linked with business models, which is what the examiner actually wants in the SBL exam. In the SBL exam, there are no marks anymore for a pure definition of business models, however, application (giving examples by providing either real example, showing business case, applying the answer to the given case) is more important.

I hope this article helps regarding the topic of strategy. In addition to providing ACCA lectures online, I also wrote articles in ACCA AB magazine. Besides, I am the author of four accounting books. If you are interested in studying ACCA courses with me, please visit my website http://www.globalapc.com for further information, where you can find many of my ACCA demo video lectures.

My name is Steve Chen, a fellow member of ACCA and course director at APC (www.globalapc.com), teaching ACCA online courses to students from all around the world. In this article, I will explain the meaning of deferred taxes in Financial Statements.

I often found accounting students having difficulties understanding the meaning of deferred taxes, although many of them know how to calculate this. Let’s start with the basics.

Deferred tax is the difference between the carrying value of assets or liabilities from an accounting perspective and tax written down value from a tax’s point of view. Let’s say for an item of property, plant, and equipment, the carrying value in accounting is $100 whereas in tax, the tax written down value (tax base) is $80, the difference of $20 is known as taxable temporary difference, ie if the asset is sold in the future, the $20 difference will be realised and should be taxed. We then use the $20 taxable temporary difference and to multiply by the current corporate income tax rate (could be referred to the current tax law or latest tax rate to be substantially enacted, say 10%), the deferred tax liability is $2 ($20 x 10%).

Let me point out a few issues regarding the above calculation. The taxable temporary difference of $20 is where the tax authority allowed the business to provide more depreciation expenses to save them tax, as depreciation expense (known as capital allowance) reduces taxable profits. However, depreciation means total cost of an asset. Because the total cost of an asset remains the same, total depreciation under accounting and tax should also be the same. Therefore, the situation will be reversed in subsequent years, ie more tax depreciation now means less tax depreciation in the future and hence, taxable temporary differences arise.

If you find the above explanation too technical, please do not worry. If you are an investor who reads financial statements of publicly listed companies, you do not need to know these detailed technical dragons. Let me explain the deferred taxes meaning from the investor’s perspective.

Deferred tax liability – if you find this item in the Financial Statements, you can deem the company is growing, ie the asset base increases such as more PP&E are purchased during the year, or liabilities being reduced such as repayment of debts during the year.

This is because an increase in asset value or a decrease in liability value often results in additional recognition of deferred tax liability. Many of my ACCA students in my ACCA lectures found this summary very useful as they will often read disclosure notes about deferred taxes to find out more about what business actually did during the year, ie acquired what assets and repaid what liabilities. Some of my ACCA students are also interested in when businesses repaid those liabilities, do they have further flexibility to arrange additional finance as well.

Deferred tax asset – if you find this term in the Financial Statements, you can deem the company has trading losses, or government is quite generous in offering additional tax credits to the business. You need to read the disclosure notes in the Financial Statements very carefully about this.

I hope this article clarifies the technical issue regarding the understanding of deferred taxes. In addition to providing ACCA lectures online, I also wrote articles in ACCA AB magazine. Besides, I am the author of four accounting books. If you are interested in studying ACCA courses with me, please visit my website http://www.globalapc.com for further information, where you can find many of my ACCA demo video lectures.

My name is Steve Chen, a fellow member of ACCA and course director at APC (www.globalapc.com) teaching ACCA online courses to students from all around the world. This article will explain business model from investment in debt instruments in IFRS 9 Financial instruments.

Suppose a business acquires debt instruments from other parties, usually known as investment in debt instrument. In that case, it needs to go through two tests (business model and Solely payments of principal and interest/SPPI test) so that the investment in debt instrument can be classified and measured as:

l Amortised cost

l Fair value through profit or loss (FVTPL)

l Fair value through other comprehensive income (FVTOCI)

The SPPI test is straightforward as if the cash flows from the contract only includes cash flows to reflect time value of money, ie in the form of interest and principal payment as well as some reasonable compensation for early termination of contract, the cash flows are deemed to be fixed and it is not likely that the investment should be classified as ‘FVTPL’. In my ACCA FR/SBR courses, I always tell my students if the contractual cash flows include ‘options’, such as convertible bonds, the classification should be at ‘FVTPL’.

However, the business model test seems to be a bit difficult here. The business model test asks a business whether the investment held is for trading purposes or held to maturity, or a combination of both. If the investment in debt instrument is held for trading purposes, such as when an investor buys the debt and when interest rate decreases, the price of the debt (for example, bond) increases, the investor may sell it to enjoy capital gain. In this case, the debt should be classified as FVTPL investment in debt instrument.

When a business usually holds debt to maturity, usually with an aim to collect fixed cash flows mentioned above, the debt should be measured at amortised cost with finance income and dividend received to be recognised each period.

For other types of financial assets, it may comprise different elements in there. For instance, part of debts is held to maturity and part of them are for sale. This is commonly seen in the banking industry where banks loaned to their customers with a right to collect their future interest and principal. However, since a bank has many high-risk businesses such as transactions in derivatives, the bank may set up a special purpose vehicle (SPV) where customers' debts are sold to those SPV to transfer risks. A bank may have the policy to sell part of those debt to SPV and allow the SPV to securitise those debts and trade them in the secondary market (known as asset securitisation). In this case, by considering factors including:

l Frequency of sales of those investments in debt instruments

l Value of sales of those investments in debt instruments

l Whether remuneration of managers is based on fair value changes of the investment portfolio

If it can be demonstrated that the investment portfolio is partly for sale and partly for held to maturity purposes in business practice, the investment in debt instrument can be classified as ‘FVTOCI’ investment in debt instrument.

Hope this article clarifies the technical issue regarding classification of investment in debt instrument. In addition to providing ACCA lectures online, I also wrote articles in ACCA AB magazine. Besides, I am an author of four accounting books. If you are interested in studying ACCA courses with me, please visit my website http://www.globalapc.com for further information where you can find many of my ACCA demo video lectures.