A few words on level 2 - 1

Good afternoon everyone! I'd like to write a few things on level 2 this week, but before I get to today’s post, I’d like to say a few words for these of you who are writing the December l1 exam, I hope you have made it through all reading materials by this weekend without experiencing too much frustration; so next 4 weeks will just be practice, practice and practice. I hope everyone is ready to do timed exams by now. It is absolutely key to go through timed exams, at least once a week now before the exam. So you get 4 exams out of the way to prepare for the exam day. I’ve introduced the key weights for l1 earlier, use that as a guideline when you are doing practice exams, keep in mind how much time you should allocate to each question and try to improve the accuracy while strictly following the time schedule to simulate the actual exam. Only 4 weeks to go guys, we are almost getting there, this is time for the sprint, prioritize your tasks and the heavily weighted sections, start practice these sections as soon as possible.

Now back to level 2. For l2 candidates out there, I’ve tried to consolidate some thoughts here on the l2 exam, the list started to get bigger and bigger so I am going to write two separate posts on this topic. So here we go.

In quant section, if you are struggling, try to focus on the basics to start, for example, interpretation of the regression line, t-test for the significance of the slope coefficients, the definition and impact of assumption violations, trend models, and the basics of AR(1) models.  As always, focus on the LOS to keep from getting overwhelmed by the concepts. This section will likely be integrated with material from other topic areas, so interpretation is the key. There are lots of concepts in quant, but since you got past L1, you can certainly get on top of the L2 quant material.

The economics material is somewhat less intense than quant, but the challenge remains the volume of material. Watch out for topics relating to foreign exchange and international economics and focus on how the economic concepts presented affect the value. For example, economic growth has value implications, as does the regulatory structure of an economy. And, the key in the study session is foreign exchange rates: be sure you know your way around the “FX triangle”. The l2 exam not only requires you to know the material, but also to be able to apply it, most of this stuff are best learned through practice questions.

Level 2 is really about accounting to many candidates. The key to being successful on FR&A is to remember that you are being tested on your skills as a user of financial statements, not a preparer of financial statements, so don’t get lost in the details of the accounting rules. Instead, focus on how the choice of accounting method affects reported financial results and especially financial ratios. This should be somewhat a guide line in next few weeks when you are doing questions.

In FR&A, the differences between accounting treatments under IFRS and US GAAP remain important for the exam. It is imperative that you devote the time necessary to understand this topic. At 15 to 25% of the Level II exam, it is almost impossible to achieve a passing score without passing the FR&A section.

What separates l2 from l1 is partially due to pensions and multinational currency translation, it is important to practice this section and master this material. Pension accounting is particularly challenging because you are expected to know the IFRS standards and the new standards under U.S. GAAP. Remember that the income statements are the same under both methods, but the balance sheets treatment of the net pension asset is substantially different. Under U.S. GAAP, the net pension asset reflects the true (economic) funded status, while under IFRS there are “unrecognized items” that cause the pension asset or liability recorded on the balance sheet to be different from the true economic position of the plan. The big-picture analytical issues are the adjustments required to reflect economic reality and to enable you to compare balance sheets prepared using different pension accounting methods. While accounting rules may seem tedious to some, focus first on how PBO and fair value of plan assets are calculated. Then you will know how changes in assumptions affect financial statements.  Then look at economic reality vs. accounting values (economic pension expense) and finally the cash flows associated with post-retirement benefits.   

This material is not that bad to comprehend if you can: a) understand the big picture, b) view pension plans as a time value of money problem, and c) are familiar with the terminology. For stock options and grants, the current treatment is straightforward. As long as the terms of the grant or options are known on the date they are granted, they are just valued as of the grant date and spread the expense over the service period necessary for the share-based compensation to be fully vested. Currency translation is a difficult topic at best and will require some work. You’ll know when you have a good understanding when you can explain the foreign currency exposure for entities based on the appropriate translation method and how the choice of accounting method affects the financial ratios.

If you are overwhelmed by pension accounting and foreign currency translation adjustments, remember that these are two of the most challenging topics in the curriculum. Also, keep in mind that the exam weight on FR&A make it worthwhile to spend the extra time to master this material.

Have a productive Sunday guys, more on l2 is on the way!