CFA Level II - LOS Changes 2017-2018 Ethics Ethics Ethics Ethics Ethics Ethics Ethics Ethics Ethics Topic LOS Level II - 2017 (464 LOS) LOS Level II - 2018 (465 LOS) Compared 1.1.a 1.1.b 1.2.a 1.2.b 1.3.a 1.3.b 2.4.a 2.4.b 2.5.a describe the six components of the Code of Ethics and the seven Standards of Professional Conduct explain the ethical responsibilities required of CFA Institute members and candidates in the CFA Program by the Code and Standards demonstrate a thorough knowledge of the Code of Ethics and Standards of Professional Conduct by applying the Code and Standards to specific situations recommend practices and procedures designed to prevent violations of the Code of Ethics and Standards of Professional Conduct explain the objectives of the Research Objectivity Standards evaluate company policies and practices related to research objectivity, and distinguish between changes required and changes recommended for compliance with the Research Objectivity Standards evaluate the practices and policies presented explain the appropriate action to take in response to conduct that violates the CFA Institute Code of Ethics and Standards of Professional Conduct evaluate the practices and policies presented 1.1.a 1.1.b 1.2.a 1.2.b 1.3.a 1.3.b 2.4.a 2.4.b 2.5.a describe the six components of the Code of Ethics and the seven Standards of Professional Conduct explain the ethical responsibilities required of CFA Institute members and candidates in the CFA Program by the Code and Standards demonstrate a thorough knowledge of the Code of Ethics and Standards of Professional Conduct by applying the Code and Standards to specific situations recommend practices and procedures designed to prevent violations of the Code of Ethics and Standards of Professional Conduct explain the objectives of the Research Objectivity Standards evaluate company policies and practices related to research objectivity, and distinguish between changes required and changes recommended for compliance with the Research Objectivity Standards evaluate the practices and policies presented explain the appropriate action to take in response to conduct that violates the CFA Institute Code of Ethics and Standards of Professional Conduct evaluate the practices and policies presented Financing or Accounting Questions? Go to passingscoreforum.com 1
Ethics Ethics Ethics Ethics Ethics Topic LOS Level II - 2017 (464 LOS) LOS Level II - 2018 (465 LOS) Compared 2.5.b 2.6.a 2.6.b 2.7.a 2.7.b explain the appropriate action to take in response to conduct that violates the CFA Institute Code of Ethics and Standards of Professional Conduct evaluate the practices and policies presented explain the appropriate action to take in response to conduct that violates the CFA Institute Code of Ethics and Standards of Professional Conduct evaluate trade allocation practices and determine whether they comply with the CFA Institute Standards of Professional Conduct addressing fair dealing and client loyalty describe appropriate actions to take in response to trade allocation practices that do not adequately respect client interests 2.5.b 2.6.a 2.6.b 2.7.a 2.7.b explain the appropriate action to take in response to conduct that violates the CFA Institute Code of Ethics and Standards of Professional Conduct evaluate the practices and policies presented explain the appropriate action to take in response to conduct that violates the CFA Institute Code of Ethics and Standards of Professional Conduct evaluate trade allocation practices and determine whether they comply with the CFA Institute Standards of Professional Conduct addressing fair dealing and client loyalty describe appropriate actions to take in response to trade allocation practices that do not adequately respect client interests Ethics Ethics 2.8.a 2.8.b 3.9.a 3.9.b evaluate the disclosure of investment objectives and basic policies and determine whether they comply with the CFA Institute Standards of Professional Conduct describe appropriate actions needed to ensure adequate disclosure of the investment process calculate and interpret a sample covariance and a sample correlation coefficient and interpret a scatter plot describe limitations to correlation analysis 2.8.a 2.8.b 3.9.a 3.9.b evaluate the disclosure of investment objectives and basic policies and determine whether they comply with the CFA Institute Standards of Professional Conduct describe appropriate actions needed to ensure adequate disclosure of the investment process calculate and interpret a sample covariance and a sample correlation coefficient and interpret a scatter plot describe limitations to correlation analysis Financing or Accounting Questions? Go to passingscoreforum.com 2
3.9.c 3.9.d 3.9.e 3.9.f 3.9.g 3.9.h 3.9.i 3.9.j 3.9.k formulate a test of the hypothesis that the population correlation coefficient equals zero and determine whether the hypothesis is rejected at a given level of significance distinguish between the dependent and independent variables in a linear regression describe the assumptions underlying linear regression and interpret regression coefficients calculate and interpret the standard error of estimate, the coefficient of determination, and a confidence interval for a regression coefficient formulate a null and alternative hypothesis about a population value of a regression coefficient and determine the appropriate test statistic and whether the null hypothesis is rejected at a given level of significance calculate the predicted value for the dependent variable, given an estimated regression model and a value for the independent variable calculate and interpret a confidence interval for the predicted value of the dependent variable describe the use of analysis of variance (ANOVA) in regression analysis, interpret ANOVA results, and calculate and interpret the F- statistic describe limitations of regression analysis 3.9.c 3.9.d 3.9.e 3.9.f 3.9.g 3.9.h 3.9.i 3.9.j 3.9.k formulate a test of the hypothesis that the population correlation coefficient equals zero and determine whether the hypothesis is rejected at a given level of significance distinguish between the dependent and independent variables in a linear regression explain the assumptions underlying linear regression and interpret regression coefficients calculate and interpret the standard error of estimate, the coefficient of determination, and a confidence interval for a regression coefficient formulate a null and alternative hypothesis about a population value of a regression coefficient and determine the appropriate test statistic and whether the null hypothesis is rejected at a given level of significance calculate the predicted value for the dependent variable, given an estimated regression model and a value for the independent variable calculate and interpret a confidence interval for the predicted value of the dependent variable describe the use of analysis of variance (ANOVA) in regression analysis, interpret ANOVA results, and calculate and interpret the F- statistic describe limitations of regression analysis Wording Change Financing or Accounting Questions? Go to passingscoreforum.com 3
3.10.a 3.10.b 3.10.c 3.10.d 3.10.e 3.10.f 3.10.g 3.10.h 3.10.i formulate a multiple regression equation to describe the relation between a dependent variable and several independent variables and determine the statistical significance of each independent variable interpret estimated regression coefficients and their p-values formulate a null and an alternative hypothesis about the population value of a regression coefficient, calculate the value of the test statistic, and determine whether to reject the null hypothesis at a given level of significance interpret the results of hypothesis tests of regression coefficients calculate and interpret 1) a confidence interval for the population value of a regression coefficient and 2) a predicted value for the dependent variable, given an estimated regression model and assumed values for the independent variables explain the assumptions of a multiple regression model calculate and interpret the F- statistic, and describe how it is used in regression analysis distinguish between and interpret the R2 and adjusted R2 in multiple regression evaluate how well a regression model explains the dependent variable by analyzing the output of the regression equation and an ANOVA table 3.10.a 3.10.b 3.10.c 3.10.d 3.10.e 3.10.f 3.10.g 3.10.h 3.10.i formulate a multiple regression equation to describe the relation between a dependent variable and several independent variables and determine the statistical significance of each independent variable interpret estimated regression coefficients and their p-values formulate a null and an alternative hypothesis about the population value of a regression coefficient, calculate the value of the test statistic, and determine whether to reject the null hypothesis at a given level of significance interpret the results of hypothesis tests of regression coefficients calculate and interpret 1) a confidence interval for the population value of a regression coefficient and 2) a predicted value for the dependent variable, given an estimated regression model and assumed values for the independent variables explain the assumptions of a multiple regression model calculate and interpret the F- statistic, and describe how it is used in regression analysis distinguish between and interpret the R2 and adjusted R2 in multiple regression evaluate how well a regression model explains the dependent variable by analyzing the output of the regression equation and an ANOVA table Financing or Accounting Questions? Go to passingscoreforum.com 4
3.10.j 3.10.k 3.10.l 3.10.m 3.10.n 3.10.o 3.11.a 3.11.b 3.11.c 3.11.d formulate a multiple regression equation by using dummy variables to represent qualitative factors and interpret the coefficients and regression results explain the types of heteroskedasticity and how heteroskedasticity and serial correlation affect statistical inference describe multicollinearity and explain its causes and effects in regression analysis describe how model misspecification affects the results of a regression analysis and describe how to avoid common forms of misspecification describe models with qualitative dependent variables evaluate and interpret a multiple regression model and its results calculate and evaluate the predicted trend value for a time series, modeled as either a linear trend or a log-linear trend, given the estimated trend coefficients describe factors that determine whether a linear or a log-linear trend should be used with a particular time series and evaluate limitations of trend models explain the requirement for a time series to be covariance stationary and describe the significance of a series that is not stationary describe the structure of an autoregressive (AR) model of order p and calculate one- and twoperiod-ahead forecasts given the estimated coefficients 3.10.j 3.10.k 3.10.l 3.10.m 3.10.n 3.10.o 3.11.a 3.11.b 3.11.c 3.11.d formulate a multiple regression equation by using dummy variables to represent qualitative factors and interpret the coefficients and regression results explain the types of heteroskedasticity and how heteroskedasticity and serial correlation affect statistical inference describe multicollinearity and explain its causes and effects in regression analysis describe how model misspecification affects the results of a regression analysis and describe how to avoid common forms of misspecification describe models with qualitative dependent variables evaluate and interpret a multiple regression model and its results calculate and evaluate the predicted trend value for a time series, modeled as either a linear trend or a log-linear trend, given the estimated trend coefficients describe factors that determine whether a linear or a log-linear trend should be used with a particular time series and evaluate limitations of trend models explain the requirement for a time series to be covariance stationary and describe the significance of a series that is not stationary describe the structure of an autoregressive (AR) model of order p and calculate one- and twoperiod-ahead forecasts given the estimated coefficients Financing or Accounting Questions? Go to passingscoreforum.com 5
3.11.e 3.11.f 3.11.g 3.11.h 3.11.i 3.11.j 3.11.k 3.11.l 3.11.m explain how autocorrelations of the residuals can be used to test whether the autoregressive model fits the time series explain mean reversion and calculate a mean-reverting level contrast in-sample and out-ofsample forecasts and compare the forecasting accuracy of different time-series models based on the root mean squared error criterion explain the instability of coefficients of time-series models describe characteristics of random walk processes and contrast them to covariance stationary processes describe implications of unit roots for time-series analysis, explain when unit roots are likely to occur and how to test for them, and demonstrate how a time series with a unit root can be transformed so it can be analyzed with an AR model describe the steps of the unit root test for nonstationarity and explain the relation of the test to autoregressive time-series models explain how to test and correct for seasonality in a time-series model and calculate and interpret a forecasted value using an AR model with a seasonal lag explain autoregressive conditional heteroskedasticity (ARCH) and describe how ARCH models can be applied to predict the variance of a time series 3.11.e 3.11.f 3.11.g 3.11.h 3.11.i 3.11.j 3.11.k 3.11.l 3.11.m explain how autocorrelations of the residuals can be used to test whether the autoregressive model fits the time series explain mean reversion and calculate a mean-reverting level contrast in-sample and out-ofsample forecasts and compare the forecasting accuracy of different time-series models based on the root mean squared error criterion explain the instability of coefficients of time-series models describe characteristics of random walk processes and contrast them to covariance stationary processes describe implications of unit roots for time-series analysis, explain when unit roots are likely to occur and how to test for them, and demonstrate how a time series with a unit root can be transformed so it can be analyzed with an AR model describe the steps of the unit root test for nonstationarity and explain the relation of the test to autoregressive time-series models explain how to test and correct for seasonality in a time-series model and calculate and interpret a forecasted value using an AR model with a seasonal lag explain autoregressive conditional heteroskedasticity (ARCH) and describe how ARCH models can be applied to predict the variance of a time series Financing or Accounting Questions? Go to passingscoreforum.com 6
3.11.n 3.11.o 3.12.a 3.12.b 3.12.c 3.12.d 3.12.e 3.12.f 3.12.g 4.13.a 4.13.b 4.13.c 4.13.d explain how time-series variables should be analyzed for nonstationarity and/or cointegration before use in a linear regression determine an appropriate timeseries model to analyze a given investment problem and justify that choice describe steps in running a simulation explain three ways to define the probability distributions for a simulation s variables describe how to treat correlation across variables in a simulation describe advantages of using simulations in decision making describe some common constraints introduced into simulations describe issues in using simulations in risk assessment compare scenario analysis, decision trees, and simulations calculate and interpret the bid ask spread on a spot or forward foreign currency quotation and describe the factors that affect the bid offer spread identify a triangular arbitrage opportunity and calculate its profit, given the bid offer quotations for three currencies distinguish between spot and forward rates and calculate the forward premium/discount for a given currency calculate the mark-to-market value of a forward contract 3.11.n 3.11.o 3.12.a 3.12.b 3.12.c 3.12.d 3.12.e 3.12.f 3.12.g 4.13.a 4.13.b 4.13.c 4.13.d explain how time-series variables should be analyzed for nonstationarity and/or cointegration before use in a linear regression determine an appropriate timeseries model to analyze a given investment problem and justify that choice describe steps in running a simulation explain three ways to define the probability distributions for a simulation s variables describe how to treat correlation across variables in a simulation describe advantages of using simulations in decision making describe some common constraints introduced into simulations describe issues in using simulations in risk assessment compare scenario analysis, decision trees, and simulations calculate and interpret the bid offer spread on a spot or forward currency quotation and describe the factors that affect the bid offer spread identify a triangular arbitrage opportunity and calculate its profit, given the bid offer quotations for three currencies distinguish between spot and forward rates and calculate the forward premium/discount for a given currency calculate the mark-to-market value of a forward contract Wording Change Financing or Accounting Questions? Go to passingscoreforum.com 7
4.13.e 4.13.f 4.13.g 4.13.h 4.13.i 4.13.j 4.13.k explain international parity relations (covered and uncovered interest rate parity, purchasing power parity, and the international Fisher effect) describe relations among the international parity conditions evaluate the use of the current spot rate, the forward rate, purchasing power parity, and uncovered interest parity to forecast future spot exchange rates explain approaches to assessing the long-run fair value of an exchange rate describe the carry trade and its relation to uncovered interest rate parity and calculate the profit from a carry trade explain how flows in the balance of payment accounts affect currency exchange rates describe the Mundell Fleming model, the monetary approach, and the asset market (portfolio balance) approach to exchange rate determination 4.13.e 4.13.f 4.13.g 4.13.h 4.13.i 4.13.j explain international parity conditions (covered and uncovered interest rate parity, forward rate parity, purchasing power parity, and the international Fisher effect) describe relations among the international parity conditions evaluate the use of the current spot rate, the forward rate, purchasing power parity, and uncovered interest parity to forecast future spot exchange rates explain approaches to assessing the long-run fair value of an exchange rate describe the carry trade and its relation to uncovered interest rate parity and calculate the profit from a carry trade explain how flows in the balance of payment accounts affect currency exchange rates Wording Change Removed 4.13.l 4.13.m forecast the direction of the expected change in an exchange rate based on balance of payment, Mundell Fleming, monetary, and asset market approaches to exchange rate determination explain the potential effects of monetary and fiscal policy on exchange rates 4.13.k explain the potential effects of monetary and fiscal policy on exchange rates Removed Financing or Accounting Questions? Go to passingscoreforum.com 8
4.13.n 4.13.o 4.13.p 4.14.a 4.14.b 4.14.c 4.14.d 4.14.e describe objectives of central bank intervention and capital controls and describe the effectiveness of intervention and capital controls describe warning signs of a currency crisis describe uses of technical analysis in forecasting exchange rates compare factors favoring and limiting economic growth in developed and developing economies describe the relation between the long-run rate of stock market appreciation and the sustainable growth rate of the economy explain why potential GDP and its growth rate matter for equity and fixed income investors distinguish between capital deepening investment and technological progress and explain how each affects economic growth and labor productivity forecast potential GDP based on growth accounting relations 4.13.l 4.13.m 4.14.a 4.14.b 4.14.c 4.14.d 4.14.e describe objectives of central bank or government intervention and capital controls and describe the effectiveness of intervention and capital controls describe warning signs of a currency crisis compare factors favoring and limiting economic growth in developed and developing economies describe the relation between the long-run rate of stock market appreciation and the sustainable growth rate of the economy explain why potential GDP and its growth rate matter for equity and fixed income investors distinguish between capital deepening investment and technological progress and explain how each affects economic growth and labor productivity forecast potential GDP based on growth accounting relations Wording Change Removed 4.14.f 4.14.g 4.14.h explain how natural resources affect economic growth and evaluate the argument that limited availability of natural resources constrains economic growth explain how demographics, immigration, and labor force participation affect the rate and sustainability of economic growth explain how investment in physical capital, human capital, and technological development affects economic growth 4.14.f 4.14.g 4.14.h explain how natural resources affect economic growth and evaluate the argument that limited availability of natural resources constrains economic growth explain how demographics, immigration, and labor force participation affect the rate and sustainability of economic growth explain how investment in physical capital, human capital, and technological development affects economic growth Financing or Accounting Questions? Go to passingscoreforum.com 9
4.14.i 4.14.j 4.14.k 4.14.l 4.15.a 4.15.b 4.15.c 4.15.d 4.15.e 4.15.f 4.15.g 4.15.h 4.15.i compare classical growth theory, neoclassical growth theory, and endogenous growth theory explain and evaluate convergence hypotheses describe the economic rationale for governments to provide incentives to private investment in technology and knowledge describe the expected impact of removing trade barriers on capital investment and profits, employment and wages, and growth in the economies involved describe classifications of regulations and regulators describe uses of self-regulation in financial markets describe the economic rationale for regulatory intervention describe regulatory interdependencies and their effects describe tools of regulatory intervention in markets explain purposes in regulating commerce and financial markets describe anticompetitive behaviors targeted by antitrust laws globally and evaluate the antitrust risk associated with a given business strategy describe benefits and costs of regulation evaluate how a specific regulation affects an industry, company, or security 4.14.i 4.14.j 4.14.k 4.14.l 4.15.a 4.15.b 4.15.c 4.15.d 4.15.e 4.15.f 4.15.g 4.15.h 4.15.i compare classical growth theory, neoclassical growth theory, and endogenous growth theory explain and evaluate convergence hypotheses describe the economic rationale for governments to provide incentives to private investment in technology and knowledge describe the expected impact of removing trade barriers on capital investment and profits, employment and wages, and growth in the economies involved describe classifications of regulations and regulators describe uses of self-regulation in financial markets describe the economic rationale for regulatory intervention describe regulatory interdependencies and their effects describe tools of regulatory intervention in markets explain purposes in regulating commerce and financial markets describe anticompetitive behaviors targeted by antitrust laws globally and evaluate the antitrust risk associated with a given business strategy describe benefits and costs of regulation evaluate how a specific regulation affects an industry, company, or security Financing or Accounting Questions? Go to passingscoreforum.com 10
5.16.a 5.16.b 5.16.c 5.17.a 5.17.b 5.17.c 5.17.d describe the classification, measurement, and disclosure under International Standards (IFRS) for 1) investments in assets, 2) investments in associates, 3) joint ventures, 4) business combinations, and 5) special purpose and variable interest entities distinguish between IFRS and US GAAP in the classification, measurement, and disclosure of investments in financial assets, investments in associates, joint ventures, business combinations, and special purpose and variable interest entities analyze how different methods used to account for intercorporate investments affect financial statements and ratios describe the types of postemployment benefit plans and implications for financial reports explain and calculate measures of a defined benefit pension obligation (i.e., present value of the defined benefit obligation and projected benefit obligation) and net pension liability (or asset) describe the components of a company s defined benefit pension costs explain and calculate the effect of a defined benefit plan s assumptions on the defined benefit obligation and periodic pension cost 5.16.a 5.16.b 5.16.c 5.17.a 5.17.b 5.17.c 5.17.d describe the classification, measurement, and disclosure under International Standards (IFRS) for 1) investments in financial assets, 2) investments in associates, 3) joint ventures, 4) business combinations, and 5) special purpose and variable interest entities distinguish between IFRS and US GAAP in the classification, measurement, and disclosure of investments in financial assets, investments in associates, joint ventures, business combinations, and special purpose and variable interest entities analyze how different methods used to account for intercorporate investments affect financial statements and ratios describe the types of postemployment benefit plans and implications for financial reports explain and calculate measures of a defined benefit pension obligation (i.e., present value of the defined benefit obligation and projected benefit obligation) and net pension liability (or asset) describe the components of a company s defined benefit pension costs explain and calculate the effect of a defined benefit plan s assumptions on the defined benefit obligation and periodic pension cost Financing or Accounting Questions? Go to passingscoreforum.com 11
5.17.e 5.17.f 5.17.g 5.17.h 5.18.a 5.18.b 5.18.c 5.18.d explain and calculate how adjusting for items of pension and other post-employment benefits that are reported in the notes to the financial statements affects financial statements and ratios interpret pension plan note disclosures including cash flow related information explain issues associated with accounting for share-based compensation explain how accounting for stock grants and stock options affects financial statements, and the importance of companies assumptions in valuing these grants and options distinguish among presentation (reporting) currency, functional currency, and local currency describe foreign currency transaction exposure, including accounting for and disclosures about foreign currency transaction gains and losses analyze how changes in exchange rates affect the translated sales of the subsidiary and parent company compare the current rate method and the temporal method, evaluate how each affects the parent company s balance sheet and income statement, and determine which method is appropriate in various scenarios 5.17.e 5.17.f 5.17.g 5.17.h 5.18.a 5.18.b 5.18.c 5.18.d explain and calculate how adjusting for items of pension and other post-employment benefits that are reported in the notes to the financial statements affects financial statements and ratios interpret pension plan note disclosures including cash flow related information explain issues associated with accounting for share-based compensation explain how accounting for stock grants and stock options affects financial statements, and the importance of companies assumptions in valuing these grants and options distinguish among presentation (reporting) currency, functional currency, and local currency describe foreign currency transaction exposure, including accounting for and disclosures about foreign currency transaction gains and losses analyze how changes in exchange rates affect the translated sales of the subsidiary and parent company compare the current rate method and the temporal method, evaluate how each affects the parent company s balance sheet and income statement, and determine which method is appropriate in various scenarios Financing or Accounting Questions? Go to passingscoreforum.com 12
5.18.e 5.18.f 5.18.g 5.18.h 5.18.i 5.18.j 6.19.a 6.19.b 6.19.c 6.19.d 6.19.e 6.19.f calculate the translation effects and evaluate the translation of a subsidiary s balance sheet and income statement into the parent company s presentation currency analyze how the current rate method and the temporal method affect financial statements and ratios analyze how alternative translation methods for subsidiaries operating in hyperinflationary economies affect financial statements and ratios describe how multinational operations affect a company s effective tax rate explain how changes in the components of sales affect the sustainability of sales growth analyze how currency fluctuations potentially affect financial results, given a company s countries of operation demonstrate the use of a conceptual framework for assessing the quality of a company s financial reports explain potential problems that affect the quality of financial reports describe how to evaluate the quality of a company s financial reports evaluate the quality of a company s financial reports describe the concept of sustainable (persistent) earnings describe indicators of earnings quality 5.18.e 5.18.f 5.18.g 5.18.h 5.18.i 5.18.j 6.19.a 6.19.b 6.19.c 6.19.d 6.19.e 6.19.f calculate the translation effects and evaluate the translation of a subsidiary s balance sheet and income statement into the parent company s presentation currency analyze how the current rate method and the temporal method affect financial statements and ratios analyze how alternative translation methods for subsidiaries operating in hyperinflationary economies affect financial statements and ratios describe how multinational operations affect a company s effective tax rate explain how changes in the components of sales affect the sustainability of sales growth analyze how currency fluctuations potentially affect financial results, given a company s countries of operation demonstrate the use of a conceptual framework for assessing the quality of a company s financial reports explain potential problems that affect the quality of financial report describe how to evaluate the quality of a company s financial reports evaluate the quality of a company s financial reports describe the concept of sustainable (persistent) earnings describe indicators of earnings quality Wording Change Financing or Accounting Questions? Go to passingscoreforum.com 13
6.19.g 6.19.h 6.19.i 6.19.j 6.19.k 6.19.l 6.19.m 6.20.a 6.20.b explain mean reversion in earnings and how the accruals component of earnings affects the speed of mean reversion evaluate the earnings quality of a company describe indicators of cash flow quality evaluate the cash flow quality of a company describe indicators of balance sheet quality evaluate the balance sheet quality of a company describe sources of information about risk demonstrate the use of a framework for the analysis of financial statements, given a particular problem, question, or purpose (e.g., valuing equity based on comparables, critiquing a credit rating, obtaining a comprehensive picture of financial leverage, evaluating the perspectives given in management s discussion of financial results) identify financial reporting choices and biases that affect the quality and comparability of companies financial statements and explain how such biases may affect financial decisions 6.19.g 6.19.h 6.19.i 6.19.j 6.19.k 6.19.l 6.19.m 6.20.a 6.20.b explain mean reversion in earnings and how the accruals component of earnings affects the speed of mean reversion evaluate the earnings quality of a company describe indicators of cash flow quality evaluate the cash flow quality of a company describe indicators of balance sheet quality evaluate the balance sheet quality of a company describe sources of information about risk demonstrate the use of a framework for the analysis of financial statements, given a particular problem, question, or purpose (e.g., valuing equity based on comparables, critiquing a credit rating, obtaining a comprehensive picture of financial leverage, evaluating the perspectives given in management s discussion of financial results) identify financial reporting choices and biases that affect the quality and comparability of companies financial statements and explain how such biases may affect financial decisions Financing or Accounting Questions? Go to passingscoreforum.com 14
6.20.c 6.20.d 6.20.e 7.21.a 7.21.b evaluate the quality of a company s financial data and recommend appropriate adjustments to improve quality and comparability with similar companies, including adjustments for differences in accounting standards, methods, and assumptions evaluate how a given change in accounting standards, methods, or assumptions affects financial statements and ratios analyze and interpret how balance sheet modifications, earnings normalization, and cash flow statement related modifications affect a company s financial statements, financial ratios, and overall financial condition calculate the yearly cash flows of expansion and replacement capital projects and evaluate how the choice of depreciation method affects those cash flows explain how inflation affects capital budgeting analysis 6.20.c 6.20.d 6.20.e 7.21.a 7.21.b evaluate the quality of a company s financial data and recommend appropriate adjustments to improve quality and comparability with similar companies, including adjustments for differences in accounting standards, methods, and assumptions evaluate how a given change in accounting standards, methods, or assumptions affects financial statements and ratios analyze and interpret how balance sheet modifications, earnings normalization, and cash flow statement related modifications affect a company s financial statements, financial ratios, and overall financial condition calculate the yearly cash flows of expansion and replacement capital projects and evaluate how the choice of depreciation method affects those cash flows explain how inflation affects capital budgeting analysis 7.21.c 7.21.d evaluate capital projects and determine the optimal capital project in situations of 1) mutually exclusive projects with unequal lives, using either the least common multiple of lives approach or the equivalent annual annuity approach, and 2) capital rationing explain how sensitivity analysis, scenario analysis, and Monte Carlo simulation can be used to assess the stand-alone risk of a capital project 7.21.c 7.21.d evaluate capital projects and determine the optimal capital project in situations of 1) mutually exclusive projects with unequal lives, using either the least common multiple of lives approach or the equivalent annual annuity approach, and 2) capital rationing explain how sensitivity analysis, scenario analysis, and Monte Carlo simulation can be used to assess the stand-alone risk of a capital project Financing or Accounting Questions? Go to passingscoreforum.com 15
7.21.e 7.21.f 7.21.g 7.21.h 7.21.i 7.22.a 7.22.b 7.22.c 7.22.d 7.22.e explain and calculate the discount rate, based on market risk methods, to use in valuing a capital project describe types of real options and evaluate a capital project using real options describe common capital budgeting pitfalls calculate and interpret accounting income and economic income in the context of capital budgeting distinguish among the economic profit, residual income, and claims valuation models for capital budgeting and evaluate a capital project using each explain the Modigliani Miller propositions regarding capital structure, including the effects of leverage, taxes, financial distress, agency costs, and asymmetric information on a company s cost of equity, cost of capital, and optimal capital structure describe target capital structure and explain why a company s actual capital structure may fluctuate around its target describe the role of debt ratings in capital structure policy explain factors an analyst should consider in evaluating the effect of capital structure policy on valuation describe international differences in the use of financial leverage, factors that explain these differences, and implications of these differences for investment analysis 7.21.e 7.21.f 7.21.g 7.21.h 7.21.i 7.22.a 7.22.b 7.22.c 7.22.d 7.22.e explain and calculate the discount rate, based on market risk methods, to use in valuing a capital project describe types of real options and evaluate a capital project using real options describe common capital budgeting pitfalls calculate and interpret accounting income and economic income in the context of capital budgeting distinguish among the economic profit, residual income, and claims valuation models for capital budgeting and evaluate a capital project using each explain the Modigliani Miller propositions regarding capital structure, including the effects of leverage, taxes, financial distress, agency costs, and asymmetric information on a company s cost of equity, cost of capital, and optimal capital structure describe target capital structure and explain why a company s actual capital structure may fluctuate around its target describe the role of debt ratings in capital structure policy explain factors an analyst should consider in evaluating the effect of capital structure policy on valuation describe international differences in the use of financial leverage, factors that explain these differences, and implications of these differences for investment analysis Financing or Accounting Questions? Go to passingscoreforum.com 16
7.23.a 7.23.b 7.23.c 7.23.d 7.23.e 7.23.f compare theories of dividend policy and explain implications of each for share value given a description of a corporate dividend action describe types of information (signals) that dividend initiations, increases, decreases, and omissions may convey explain how clientele effects and agency issues may affect a company s payout policy explain factors that affect dividend policy calculate and interpret the effective tax rate on a given currency unit of corporate earnings under double taxation, dividend imputation, and split-rate tax systems compare stable dividend, constant dividend payout ratio, and residual dividend payout policies, and calculate the dividend under each policy 7.23.a 7.23.b 7.23.c 7.23.d 7.23.e 7.23.f 7.23.g 7.23.h 7.23.i describe the expected effect of regular cash dividends, extra dividends, liquidating dividends, stock dividends, stock splits, and reverse stock splits on shareholders wealth and a company s financial ratios compare theories of dividend policy and explain implications of each for share value given a description of a corporate dividend action describe types of information (signals) that dividend initiations, increases, decreases, and omissions may convey explain how clientele effects and agency costs may affect a company s payout policy explain factors that affect dividend policy in practice calculate and interpret the effective tax rate on a given currency unit of corporate earnings under double taxation, dividend imputation, and split-rate tax systems compare stable dividend, constant dividend payout ratio, and residual dividend payout policies, and calculate the dividend under each policy compare share repurchase methods calculate and compare the effect of a share repurchase on earnings per share when 1) the repurchase is financed with the company s surplus cash and 2) the company uses debt to finance the repurchase Financing or Accounting Questions? Go to passingscoreforum.com 17 New Wording Change Wording Change New New
7.23.g 7.23.h 7.23.i 7.23.j 8.24.a 8.24.b 8.24.c 8.24.d explain the choice between paying cash dividends and repurchasing shares describe broad trends in corporate dividend policies calculate and interpret dividend coverage ratios based on 1) net income and 2) free cash flow identify characteristics of companies that may not be able to sustain their cash dividend compare interests of key stakeholder groups and explain the purpose of a stakeholder impact analysis discuss problems that can arise in principal agent relationships and mechanisms that may mitigate such problems discuss roots of unethical behavior and how managers might ensure that ethical issues are considered in business decision making compare the Friedman doctrine, Utilitarianism, Kantian Ethics, and Rights and Justice Theories as approaches to ethical decision making 7.23.j 7.23.k 7.23.l 7.23.m 7.23.n 8.24.a 8.24.b 8.24.c 8.24.d calculate the effect of a share repurchase on book value per share explain the choice between paying cash dividends and repurchasing shares describe broad trends in corporate payout policies calculate and interpret dividend coverage ratios based on 1) net income and 2) free cash flow identify characteristics of companies that may not be able to sustain their cash dividend compare interests of key stakeholder groups and explain the purpose of a stakeholder impact analysis discuss problems that can arise in principal agent relationships and mechanisms that may mitigate such problems discuss roots of unethical behavior and how managers might ensure that ethical issues are considered in business decision making compare the Friedman doctrine, Utilitarianism, Kantian Ethics, and Rights and Justice Theories as approaches to ethical decision making New Wording Change 8.25.a 8.25.b describe objectives and core attributes of an effective corporate governance system and evaluate whether a company s corporate governance has those attributes compare major business forms and describe the conflicts of interest associated with each 8.25.a 8.25.b describe objectives and core attributes of an effective corporate governance system and evaluate whether a company s corporate governance has those attributes compare major business forms and describe the conflicts of interest associated with each Financing or Accounting Questions? Go to passingscoreforum.com 18
8.25.c 8.25.d 8.25.e 8.25.f 8.25.g 8.25.h 8.26.a 8.26.b 8.26.c 8.26.d explain conflicts that arise in agency relationships, including manager share- holder conflicts and director shareholder conflicts describe responsibilities of the board of directors and explain qualifications and core competencies that an investment analyst should look for in the board of directors explain effective corporate governance practice as it relates to the board of directors and evaluate strengths and weaknesses of a company s corporate governance practice describe elements of a company s statement of corporate governance policies that investment analysts should assess describe environmental, social, and governance risk exposures explain the valuation implications of corporate governance classify merger and acquisition (M&A) activities based on forms of integration and relatedness of business activities explain common motivations behind M&A activity explain bootstrapping of earnings per share (EPS) and calculate a company s post-merger EPS explain, based on industry life cycles, the relation between merger motivations and types of mergers 8.25.c 8.25.d 8.25.e 8.25.f 8.25.g 8.25.h 8.26.a 8.26.b 8.26.c 8.26.d explain conflicts that arise in agency relationships, including manager share- holder conflicts and director shareholder conflicts describe responsibilities of the board of directors and explain qualifications and core competencies that an investment analyst should look for in the board of directors explain effective corporate governance practice as it relates to the board of directors and evaluate strengths and weaknesses of a company s corporate governance practice describe elements of a company s statement of corporate governance policies that investment analysts should assess describe environmental, social, and governance risk exposures explain the valuation implications of corporate governance classify merger and acquisition (M&A) activities based on forms of integration and relatedness of business activities explain common motivations behind M&A activity explain bootstrapping of earnings per share (EPS) and calculate a company s post-merger EPS explain, based on industry life cycles, the relation between merger motivations and types of mergers Financing or Accounting Questions? Go to passingscoreforum.com 19
8.26.e 8.26.f 8.26.g 8.26.h 8.26.i 8.26.j 8.26.k 8.26.l 8.26.m contrast merger transaction characteristics by form of acquisition, method of payment, and attitude of target management distinguish among pre-offer and post-offer takeover defense mechanisms calculate and interpret the Herfindahl Hirschman Index and evaluate the likelihood of an antitrust challenge for a given business combination compare the discounted cash flow, comparable company, and comparable transaction analyses for valuing a target company, including the advantages and disadvantages of each calculate free cash flows for a target company and estimate the company s intrinsic value based on discounted cash flow analysis estimate the value of a target company using comparable company and comparable transaction analyses evaluate a takeover bid and calculate the estimated postacquisition value of an acquirer and the gains accrued to the target shareholders versus the acquirer shareholders explain how price and payment method affect the distribution of risks and benefits in M&A transactions describe characteristics of M&A transactions that create value 8.26.e 8.26.f 8.26.g 8.26.h 8.26.i 8.26.j 8.26.k 8.26.l 8.26.m contrast merger transaction characteristics by form of acquisition, method of payment, and attitude of target management distinguish among pre-offer and post-offer takeover defense mechanisms calculate and interpret the Herfindahl Hirschman Index and evaluate the likelihood of an antitrust challenge for a given business combination compare the discounted cash flow, comparable company, and comparable transaction analyses for valuing a target company, including the advantages and disadvantages of each calculate free cash flows for a target company and estimate the company s intrinsic value based on discounted cash flow analysis estimate the value of a target company using comparable company and comparable transaction analyses evaluate a takeover bid and calculate the estimated postacquisition value of an acquirer and the gains accrued to the target shareholders versus the acquirer shareholders explain how price and payment method affect the distribution of risks and benefits in M&A transactions describe characteristics of M&A transactions that create value Financing or Accounting Questions? Go to passingscoreforum.com 20
8.26.n 8.26.o 9.27.a 9.27.b 9.27.c 9.27.d 9.27.e 9.27.f 9.27.g 9.27.h 9.28.a 9.28.b distinguish among equity carveouts, spin-offs, split-offs, and liquidation explain common reasons for restructuring define valuation and intrinsic value and explain sources of perceived mispricing explain the going concern assumption and contrast a going concern value to a liquidation value describe definitions of value and justify which definition of value is most relevant to public company valuation describe applications of equity valuation describe questions that should be addressed in conducting an industry and competitive analysis contrast absolute and relative valuation models and describe examples of each type of model describe sum-of-the-parts valuation and conglomerate discounts explain broad criteria for choosing an appropriate approach for valuing a given company distinguish among realized holding period return, expected holding period return, required return, return from convergence of price to intrinsic value, discount rate, and internal rate of return calculate and interpret an equity risk premium using historical and forward-looking estimation approaches 8.26.n 8.26.o 9.27.a 9.27.b 9.27.c 9.27.d 9.27.e 9.27.f 9.27.g 9.27.h 9.28.a 9.28.b distinguish among equity carveouts, spin-offs, split-offs, and liquidation explain common reasons for restructuring define valuation and intrinsic value and explain sources of perceived mispricing explain the going concern assumption and contrast a going concern value to a liquidation value describe definitions of value and justify which definition of value is most relevant to public company valuation describe applications of equity valuation describe questions that should be addressed in conducting an industry and competitive analysis contrast absolute and relative valuation models and describe examples of each type of model describe sum-of-the-parts valuation and conglomerate discounts explain broad criteria for choosing an appropriate approach for valuing a given company distinguish among realized holding period return, expected holding period return, required return, return from convergence of price to intrinsic value, discount rate, and internal rate of return calculate and interpret an equity risk premium using historical and forward-looking estimation approaches Financing or Accounting Questions? Go to passingscoreforum.com 21
Topic LOS Level II - 2017 (464 LOS) LOS Level II - 2018 (465 LOS) Compared 9.28.c 9.28.d 9.28.e 9.28.f 9.28.g 9.28.h 10.29.a 10.29.b 10.29.c estimate the required return on an equity investment using the capital asset pricing model, the Fama French model, the Pastor Stambaugh model, macroeconomic multifactor models, and the build-up method (e.g., bond yield plus risk premium) explain beta estimation for public companies, thinly traded public companies, and nonpublic companies describe strengths and weaknesses of methods used to estimate the required return on an equity investment explain international considerations in required return estimation explain and calculate the weighted average cost of capital for a company evaluate the appropriateness of using a particular rate of return as a discount rate, given a description of the cash flow to be discounted and other relevant facts compare top-down, bottom-up, and hybrid approaches for developing inputs to equity valuation models compare growth relative to GDP growth and market growth and market share approaches to forecasting revenue evaluate whether economies of scale are present in an industry by analyzing operating margins and sales levels 9.28.c 9.28.d 9.28.e 9.28.f 9.28.g 9.28.h 10.29.a 10.29.b 10.29.c estimate the required return on an equity investment using the capital asset pricing model, the Fama French model, the Pastor Stambaugh model, macroeconomic multifactor models, and the build-up method (e.g., bond yield plus risk premium) explain beta estimation for public companies, thinly traded public companies, and nonpublic companies describe strengths and weaknesses of methods used to estimate the required return on an equity investment explain international considerations in required return estimation explain and calculate the weighted average cost of capital for a company evaluate the appropriateness of using a particular rate of return as a discount rate, given a description of the cash flow to be discounted and other relevant facts compare top-down, bottom-up, and hybrid approaches for developing inputs to equity valuation models compare growth relative to GDP growth and market growth and market share approaches to forecasting revenue evaluate whether economies of scale are present in an industry by analyzing operating margins and sales levels Financing or Accounting Questions? Go to passingscoreforum.com 22