Case study ep november 2012 ICAEW

Wednesday November 2012 (4 hours) CASE STUDY CANDIDATE NUMBER DO NOT TURN OVER UNTIL YOU ARE TOLD TO DO SO When instructed: a b check that your question paper contains all the required pages The Institute’s consecutive page numbering may be found under the base line at the foot of each page; enter your candidate number in the box provided above Number each page of your answer consecutively using the space provided at the top right of each sheet Ensure that your candidate number is written on each page of your answer After the instruction to stop writing at the end of the paper, you will be given five minutes to assemble your answer in this folder Fasten your complete script inside this folder using the hole in the back page and the tag provided Do not include your question paper in the folder Answer folders and examination stationery, used or unused, must not be removed from the Examination Hall Question papers may, however, be retained by candidates Your answer must be submitted on the paper provided by the ICAEW in the Examination Hall Any pre-prepared papers, or papers comprising annotated exhibits from the case material, included in your answer WILL NOT be marked by the examiners ICAEW USE ONLY 163068 BLANK PAGE November 2012 Case Study: Fluent Speech Limited List of exhibits The following exhibits were included in the material provided as Advance Information: You (Charlie Monks), your firm Griffiths Brett (GB), your client, Fluent Speech Limited (FS) Language schools: UK industry background Fluent Speech Limited (FS): History and background Fluent Speech Limited: Profile of current clients Email from Art Manor (FD of FS) to Enid Lightfoot (GB) dated December 2011: Review of FS recent financial history Fluent Speech Limited: Management accounts for the three years ended 30 September 2011 Email from Art Manor (FD of FS) to Enid Lightfoot (GB) dated 12 December 2011: FS Strategic review and additional information re FS activities FS quarterly cash analysis for the year to 30 September 2011 FS accounts receivable schedule for the year to 30 September 2011 10 FS English programmes for speakers of other languages (ESOL), including additional financial and market information 11 FS foreign language programmes, including additional financial and market information 12 FS translation and interpreting work 13 FS learning materials and examination fees 14 News articles The following items are newly provided: 15 Email dated November 2012 from Enid Lightfoot to Charlie Monks 16 Email dated November 2012 from Art Manor to Enid Lightfoot 17 FS management accounts for the year to 30 September 2012 18 FS quarterly cash analysis and accounts receivable schedule for the year to 30 September 2012 19 Email dated 30 October 2012 from Edwin Sanguine to Art Manor, together with related email to Enid Lightfoot 20 News article, together with an email dated November 2012 from Paz Trans to Enid Lightfoot ICAEW/CS/N12 of 17 BLANK PAGE ICAEW/CS/N12 of 17 Fluent Speech Limited: Case Study requirement You are Charlie Monks, a final-year trainee Chartered Accountant working in the business advisory department of Griffiths Brett Chartered Accountants (GB) Your client is Fluent Speech Limited (FS), a company engaged in English and foreign language tuition and related activities in the UK You report to Enid Lightfoot, a partner in GB Requirement You are required to prepare a draft report for the FS board, as set out in the email dated November 2012 from Enid Lightfoot to you (Exhibit 15) Your report should comprise the following four elements:   An executive summary Your responses to the three detailed requirements set out in Exhibit 15, including financial appendices (as required) State clearly any assumptions that you make All workings should be attached to your answer Your report should be balanced across the three detailed requirements, and the following time allocation is suggested: Reading and planning Performing calculations and financial analysis Drafting report hour hour hours Marks allocation All of the marks in the Case Study are awarded for the demonstration of professional skills, allocated broadly as follows: Applied to the four elements of your report (as described above)  Assimilating and using information  Structuring problems and solutions  Applying judgement  Drawing conclusions and making recommendations Applied to your report as a whole  Demonstrating integrative and multidisciplinary skills  Presenting appropriate appendices 20% 25% 25% 20% 90% 5% 5% 100% Of the total marks available, 15% are awarded for the executive summary and approximately 10% for the relevant discussion of ethical issues within your answer to the requirements In planning your report, you should be aware that not attempting one of the requirements will have a significantly detrimental effect on your chances of success, as will not submitting an executive summary In addition, as indicated above, all four skills areas will be assessed under each of the four elements of your report Accordingly, not demonstrating your judgement and failing to include appropriate conclusions and/or recommendations in each element of your report will affect your chances of success ICAEW/CS/N12 of 17 BLANK PAGE ICAEW/CS/N12 of 17 EXHIBIT 15 EMAIL From: To: Subject: Date: Enid Lightfoot Charlie Monks Fluent Speech Limited (FS) November 2012 FS has just completed an important trading year It now requires our assistance in assessing the past year and advice on dealing with ongoing issues arising from its translation work and its English language programmes, as well as new business opportunities associated with Brazil I am attaching the following:      An email from Art Manor describing FS’s current situation (Exhibit 16) FS’s management accounts for the year to 30 September 2012 (Exhibit 17) Detailed FS quarterly cash analysis for the year to 30 September 2012 (Exhibit 18(i)), plus accounts receivable information for the same period (Exhibit 18(ii)) An email from Edwin Sanguine with details of a possible new rental proposal, together with an email from Art Manor (Exhibit 19) News article relating to new business opportunities for FS, together with an email from Paz Trans (Exhibit 20) Please draft for my review a report addressed to the FS board The report should comprise: A review of FS’s management accounts for the year to 30 September 2012, as presented in Exhibit 17 Your review should analyse the revenue and gross profit by comparison with the year to 30 September 2011, both for FS overall and by reference to each of the three primary revenue streams You should also analyse the impact of translation & interpreting services on movements in cash (Exhibit 18(i)) and accounts receivable (Exhibit 18(ii)) in the year to 30 September 2012 Include in your analysis the Myanmarpic2012 Limited (MP) problem identified by Art Manor in Exhibit 16 An assessment of the new rental proposal with Banbury Building & Properties Limited (BBP) (Exhibit 19) Using the information provided by Edwin Sanguine, you should assess the financial impact of the new rental proposal for the years to 30 September 2013 and 2014 from the semester/long English language programmes by calculating the additional contribution to be earned and discussing the cash implications, identifying any other important factors for FS You should review and comment on the assumptions made by Edwin in Exhibit 19 and explain any other assumptions you make An evaluation of the potential new business opportunities for FS arising from the market developments associated with Brazil, as identified by Paz Trans from the recent news article (Exhibit 20) You should consider all the benefits and risks of the business opportunities for FS, across the range of its three primary revenue streams, both in the UK and in Brazil, including any possible ethical concerns I look forward to receiving your draft report ICAEW/CS/N12 of 17 BLANK PAGE ICAEW/CS/N12 of 17 EXHIBIT 16 EMAIL From: To: Subject: Date: Art Manor Enid Lightfoot FS Financial review 2012 and problems with translation & interpreting services November 2012 Please find attached the FS management accounts for the year to 30 September 2012 (Exhibit 17), together with the quarterly cash analysis (Exhibit 18(i)) and accounts receivable information (Exhibit 18(ii)) for the year FS experienced a change in activity caused by the London 2012 Olympics and Paralympics (‘the Games’) It was fortunate in that demand for translation services rose steadily in the 12 months before the Games (demand for interpreting has also been high since June 2012 – when participants and their support teams started arriving in the UK) However, in hindsight, FS may have been naïve in respect of bidding for fixed price translation & interpreting contracts and then finding that there had been a shortage of skilled linguists to the work An additional problem has occurred with one of the organisations requiring our services during 2012: Myanmarpic2012 Limited (MP), a Myanmar-registered company that promotes tourism to Myanmar (Burma) MP commissioned FS to translate booklets and brochures from Burmese (the main language in Myanmar) into English, to be handed out to visitors to the UK during the period of the Games, encouraging them to visit Myanmar and hence boosting tourism in that country For this work we had to advertise for and recruit new translators Initially the contract went well FS invoiced MP’s UK subsidiary in sterling and the subsidiary paid FS with a 60-day delay from the end of the month of invoice, which is not unusual On the other side, FS paid the Burmese translators within 30 days of them completing their work, having agreed a translation rate approximating to 75% of the fee that FS was charging to MP The contract progressed and the volume of work grew, but MP became a slower payer MP stated that funds were being transferred from Myanmar but were being slowed by exchange controls and by the general volume of business with the UK in the run-up to the Games FS continued to pay its Burmese translators on time In summary, MP owed nothing at the start of year FS invoiced MP a total of £872,000 as follows: Qtr2 £240,000; Qtr3 £625,000; Qtr4 £7,000 FS received payment for 80% of the Qtr2 invoices: £92,000 in Qtr3 and £100,000 in Qtr4, but no other amounts have yet been settled FS paid the Burmese translators £654,000 in total in Qtrs 2, and MP recently (17 October 2012) sent a letter disputing the quality of the FS translation on one document Since the end of the Games in September, the volume of translation & interpreting work has fallen back to its 2010 level Cash is being received from other translation & interpreting clients but not at the speed FS requires Please could your firm analyse our revenue and gross profit during this year by comparison with the year to 30 September 2011, both for FS overall and by reference to each of the three primary revenue streams You should also analyse the impact of translation & interpreting services on movements in cash and accounts receivable in the year to 30 September 2012 Please include in your analysis the MP problem ICAEW/CS/N12 of 17 BLANK PAGE ICAEW/CS/N12 of 17 EXHIBIT 17 Fluent Speech Limited Management accounts Income statement Year ended 30 September 2012 Notes £000s Revenue Direct costs Gross profit Administrative expenses Operating profit Net finance income Profit before taxation Taxation Profit after taxation 10,503 (6,662) 3,841 (2,576) 1,265 30 1,295 (336) 959 Statement of financial position At 30 September 2012 £000s Non-current assets Property, plant and equipment Current assets Inventories Accounts receivable Cash and cash equivalents Total assets 111 2,959 592 3,662 3,996 Equity Ordinary share capital Retained earnings Total equity Current liabilities Accounts payable Total current liabilities 100 2,963 3,063 Total equity and liabilities ICAEW/CS/N12 334 334 933 933 3,996 of 17 Statement of cash flows Year ended 30 September 2012 £000s Cash flows from operating activities Profit before tax Adjustments for: Depreciation Net finance income 1,295 51 (30) 1,316 (7) (1,363) (94) (148) (225) 30 (343) Change in inventories Change in accounts receivable Change in accounts payable Cash generated from operations Taxation paid Net finance income Net cash from operating activities Net change in cash and cash equivalents Cash and cash equivalents at start of year Cash and cash equivalents at end of year (343) 935 592 Notes to the management accounts Note Revenue £000s Primary English language tuition programmes Foreign language tuition programmes Translation & interpreting services Secondary Sales of learning materials Examination fees 2,314 2,029 3,339 1,398 1,423 10,503 Note Direct costs £000s Primary English language tutors Foreign language tutors Translation & interpreting services Secondary Learning materials Exam registration & related costs ICAEW/CS/N12 1,186 1,023 2,548 754 1,151 6,662 10 of 17 Note Administrative expenses £000s 903 882 114 211 117 82 51 110 62 44 2,576 Salaries (including directors) Hire of teaching & language facilities Marketing & communications Establishment & office Licensing, computer & IT running costs Legal & professional Depreciation Bad & doubtful debts Vehicle running & maintenance costs Student rental liaison services Note Non-current assets Cost At October 2011 and 30 September 2012 Depreciation At October 2011 Charge for the year At 30 September 2012 Carrying amount at 30 September 2011 Carrying amount at 30 September 2012 Freehold land and buildings £000s 300 £000s 112 Language and office equipment £000s 306 £000s 718 136 144 34 15 49 163 28 191 333 51 384 164 156 78 63 143 115 385 334 £000s Note Accounts receivable English language fees Foreign language fees Translation & interpreting services Sales of learning materials Examination fees 142 231 2,314 154 118 2,959 Note Accounts payable Translation & interpreting services Payroll taxes Accruals Corporation tax Deferred income: English language fees ICAEW/CS/N12 11 of 17 197 37 12 336 351 933 Furniture & fixtures Total BLANK PAGE ICAEW/CS/N12 12 of 17 EXHIBIT 18(i) Fluent Speech Limited Quarterly cash analysis For the year to 30 September 2012 Qtr3 £000s Qtr4 £000s 364 607 554 497 408 519 817 202 261 2,134 2,005 1,957 513 454 2,834 2,834 353 342 2,220 2,220 276 312 2,012 2,012 244 295 1,819 30 1,849 1,386 1,403 8,885 30 8,915 279 303 597 268 275 578 238 256 617 401 189 705 1,186 1,023 2,497 168 334 1,681 161 287 1,569 176 251 1,538 256 279 1,830 761 1,151 6,618 Payments: administration 585 560 574 696 2,415 Payments: other (tax) - - 225 - 225 9,258 Receipts Primary English language fees Foreign language fees Translation & interpreting services Secondary Sales of learning materials Examination fees Other receipts (net finance) Payments: direct costs Primary English language tutors Foreign language tutors Translation and interpreting services Secondary Learning materials Exam registration & related costs Qtr1 £000s Qtr2 £000s 456 788 623 Total 2012 £000s Payments: total 2,266 2,129 2,337 2,526 Opening cash balance Net movement Closing cash balance 935 568 1,503 1,503 91 1,594 1,594 (325) 1,269 1,269 (677) 592 Deferred income of £351,000 is included in English language receipts ICAEW/CS/N12 13 of 17 935 (343) 592 EXHIBIT 18(ii) FS accounts receivable 2012 English language clients Motor industry clients Other UK industry clients Independent participants Foreign language clients Motor industry clients Other industry clients Independent participants Translation & interpreting clients Existing clients Other translation clients Other interpreting clients Learning materials and examination fees Learning materials Examination fees Total Receivables at Oct 2011 £000s Receivables Bad debt at 30 Sept 2012 2012 £000s £000s Revenue 2012 £000s Receipts 2012 £000s 116 25 12 153 699 294 825 1,818 (727) (290) (766) (1,783) (11) (35) (46) 88 18 36 142 135 67 207 1,327 578 124 2,029 (1,316) (569) (120) (2,005) - 146 76 231 550 444 996 870 1,958 511 3,339 (1,032) (785) (140) (1,957) (64) (64) 324 1,617 373 2,314 142 98 240 1,596 1,398 1,423 2,821 10,007 (1,386) (1,403) (2,789) (8,534) (110) 154 118 272 2,959 Notes    The Myanmarpic2012 Limited (MP) translation work is included with other translation clients The revenue total differs from the accounts figure by £496,000 – deferred revenue transfer The cash received differs from the quarterly cash analysis by £351,000 (Exhibit 18(i)) – closing deferred revenue ICAEW/CS/N12 14 of 17 EXHIBIT 19 EMAIL From: To: Subject: Date: Edwin Sanguine (Director of Languages Operations) Art Manor (FD) English language programmes 30 October 2012 You will recall that in March 2011 FS was concerned about its cash flow and seeking to take action to conserve cash We decided to cancel our annual rental of the teaching facility near Banbury (where it could run 12 of its semester/long English language programmes) The financial details of the cancellation were provided in an email to Enid Lightfoot dated December 2011 (Exhibit 5) The cancellation was in response to the assumption that there would be a downturn in demand for the semester/long English language programmes because of the potential restrictions on visas for English language students by UKBA that could affect these programmes going forward The effect in 2011 was that FS reduced its semester/long programme in Qtr3 by 12 groups The visa situation has continued to evolve, but in the interim the semester/long programme has been oversubscribed This is because FS has continued to meet all the UKBA requirements for candidate selection, contact hours and monitoring of students attending its English language programmes, whilst other more peripheral language colleges have been closed FS assumes that it will continue to meet those requirements in future A review of demand for the semester/long programmes indicates that FS should be able to re-establish them to run, as before (normally Qtrs 1, 2, and 3) It now appears possible that only some of the relevant factors were taken into account in the previous analysis and that the decision to cancel the original rental agreement was based on immediate cash savings only – whereas it should also have considered other longer-term criteria, such as contribution FS has recently contacted the previous landlord, Banbury Building & Properties Limited (BBP), which has indicated that FS can rent the premises again – starting from January 2013 at a rent of £120,000 per annum (payable annually in advance, as before) These premises can still fit 12 groups per semester EMAIL From: To: Subject: Date: Art Manor Enid Lightfoot English language programmes 31 October 2012 Please see above email from Edwin Please would your team analyse and advise FS on the proposal to rent the Banbury premises to run the semester/long English language programme on an annual basis Please assess the financial impact of the new rental proposal for the years to 30 September 2013 and 2014 from the semester/long English language programmes by calculating the additional contribution to be earned and discussing the cash implications, identifying any other important factors for FS ICAEW/CS/N12 15 of 17 BLANK PAGE ICAEW/CS/N12 16 of 17 EXHIBIT 20 Financial Chronicle 15 October 2012 Follow-up mission to Brazil deemed huge commercial success A follow-up trade mission comprising more than 30 UK manufacturing and trading organisations, based mainly in the Midlands in the UK, has made a very successful second visit to Brazil to promote UK products and services which it is hoped will lead to increased exports to Brazil One of the UK team, Lynne Burroughs, CEO of Accredita plc, a financial services organisation based in Milton Keynes and employing over 700 staff, stated: “With an ever-increasing level of affluence in Brazil, our marketing department has identified that there are now large numbers of Brazilians who are less sophisticated about investing in financial products and who would represent a fresh market for our UK pensions and other financial services products.” Other members of this trade mission included the inventors of the R-comp, a basic computer which enables introductory programming and which sells in the UK for less than £50 The Managing Director of R-comp, Jan Lessing, himself a polyglot computer engineer, said: “It is going to be hugely important to have translators and interpreters in Brazil who know our product, are enthusiastic about computers and their capabilities, and who can communicate with us in the UK, as well as with the local partners we would like to establish in Brazil The market for this product is enormous in Brazil (many times the size of our UK market), and we not want to miss this opportunity for a significant increase in our exports because of the absence of good linguists Previous poor translations of our technical manuals for other markets have been disastrous.” R-comp has its base to the east of Birmingham in the Midlands, where it already employs more than 200 people As well as being one of the four BRIC economies whose growth is seen as being a key factor in generating world trade, Brazil is also due to host the FIFA World Cup in 2014 and the Olympics and Paralympics in 2016 It is currently seen as one of the few countries in the world able to finance major events successfully at a time when the rate of growth in the global economy is continuing to slow EMAIL From: To: Subject: Date: Paz Trans Enid Lightfoot Trade mission to Brazil: Possible business opportunities for FS November 2012 Further to the above article about the follow-up trade mission to Brazil, one of the problems is the ongoing lack of competent speakers of Brazilian-Portuguese available to help the companies communicate easily with potential commercial partners In the last two weeks FS has been contacted by both Lynne Burroughs and Jan Lessing about the possibility of working with their organisations to develop language training, translation work and identifying good interpreters in both the UK and Brazil Last week we were also contacted by XL Auto-components, an existing client, which is considering increasing its component manufacturing for Brazil There is clearly an increasing market for FS, both in the UK and in Brazil, across the range of FS’s three primary revenue streams Although we have no expertise in Brazilian-Portuguese, we could probably utilise our European-Portuguese freelance translators initially FS would welcome your firm’s thoughts on the benefits and risks of these new business opportunities ICAEW/CS/N12 17 of 17 ... Email dated November 2012 from Enid Lightfoot to Charlie Monks 16 Email dated November 2012 from Art Manor to Enid Lightfoot 17 FS management accounts for the year to 30 September 2012 18 FS quarterly... to 30 September 2012 19 Email dated 30 October 2012 from Edwin Sanguine to Art Manor, together with related email to Enid Lightfoot 20 News article, together with an email dated November 2012 from... activities in the UK You report to Enid Lightfoot, a partner in GB Requirement You are required to prepare a draft report for the FS board, as set out in the email dated November 2012 from Enid Lightfoot