Case study november 2012 marks plan ICAEW

CASE STUDY – NOVEMBER 2012 EXAMINERS’ COMMENTS AND MARK PLAN Contents Page Part 1: Executive summary Introduction Overview of performance Part 2: The Case Study examination Scenario for the paper (Advance Information) Analysis of Advance Information Information provided in the examination (Exam Paper) Examination requirements Analysis of Exam Paper Information Summary of grades available 11 Part 3: Commentary on candidates’ performance Professional skills 12 Executive summary 14 Requirement 1: FS Financial analysis / Myanmarpic2012 14 Requirement 2: Assessment of Banbury rental proposal 15 Requirement 3: Evaluation of new business opportunities 15 Overall paper 16 Part 4: Appendices Appendix 1: Analysis of 30 September 2012 financial statements 17 Appendix 2: Contribution and cash calculations re Banbury proposal 19 Part 5: Marking Key Copyright ©The ICAEW 2012 Page of 19 CASE STUDY – NOVEMBER 2012 PART 1: EXECUTIVE SUMMARY Introduction This report covers the November 2012 Case Study exam It is issued in conjunction with two illustrative scripts and related Examiners’ commentaries The first script was in the first quartile of all assessed scripts; the second failed the exam In reviewing these scripts, it is important to be aware that it is rare for a script to be uniformly ‘good’ or uniformly ‘bad’ A successful script will present appropriate coverage of all requirements but may include errors of calculation or logic; an unsuccessful script may contain one or two appropriate sections and/or some good points but be let down by poor or incomplete text elsewhere Attached to this report are appendices with examples of the sort of work that candidates did, or might have done, under ‘financial analysis’ The two illustrative scripts offer further insights in the area of financial analysis Overview of performance 74.1% of all candidates sitting the paper passed, compared with 74.1% in July 2012 and 73.9% in November 2011 The pass rate reflects the fact that this case was of a similar standard to all recent case studies As in recent papers the examiners had introduced factors in both Requirements and which made those requirements slightly less predictable The Advance Information (AI) informs candidates that the Fluent Speech Limited (FS) case concerns a company operating in the language tuition and translation sector FS was created in 1993 by its four directors, who are equal shareholders FS currently earns its revenue from three primary streams: (i) English Language Tuition (ELT); (ii) Foreign Language Tuition (FLT); and (iii) Translation and Interpreting (T&I) work It also earns revenue from secondary revenue streams: exam fees and sales of learning materials The candidate is in the role of Charlie Monks, a final-year trainee Chartered Accountant working in the business advisory department of Griffiths Brett reporting to the engagement partner Enid Lightfoot FS is a new client The FS sales mix between the three primary streams has been altering over time and since 2009 revenue from ELT, traditionally the dominant stream, has been declining with revenue from FLT increasing steadily and revenue from T&I increasing significantly, albeit from a smaller base From the management accounting information in the Exam Paper (EP) it can be seen that there has been a significant increase in overall revenue and that the sales mix had continued to alter – largely as a result of increased translation and interpreting work associated with the 2012 Olympics The company maintains adequate cash resources The FS case requirements in the EP followed on from the information provided in the AI In summary these requirements comprised: (1) an analysis of the 12-month financial statements for FS to 30 September 2012 against specifically defined yardsticks: revenue and gross profit (overall and by primary revenue stream), as well as an analysis of the receivables and cash relating to T&I work and the consideration of the specific problem caused by one T&I client Myanmarpic2012 Limited (MP); (2) an analysis of a proposal to re-open a teaching facility, which FS had previously closed, for use on its semester ELT programmes, considering both contribution and cash flow implications; (3) an evaluation of the risks and benefits to FS of new opportunities which might arise as result of increased trading by potential and existing clients with Brazil As in previous case studies the exam rubric specifically told candidates that an executive summary was to be provided and that the report should be balanced between the three elements This exam rubric is provided as an important guide to candidates and following that guidance is crucial to a candidate’s success Tutor firms have commented that “the requirements for this case were fairly predictable given the Advance Information” and that these requirements were “clear and unambiguous” It was also stated that “students were not asked to anything unusual, unfair or outside their capabilities, but they will need to have been well organised to complete it in the time allocated” The Case Study examiners consider that these tutor comments reflect an accurate summary of this case study and of its target to assess candidates’ professional skills Successful candidates followed the instructions contained in the rubric and produced well-balanced, relevant answers to the three main requirements, as well as appropriate appendices and concise, relevant executive summaries Successful scripts were balanced, clear and focused They dealt with the requirements as set and contained little superfluous information At the very top end scripts were of a quality that was a delight to assess Copyright ©The ICAEW 2012 Page of 19 CASE STUDY – NOVEMBER 2012 Candidates who failed did so for a number of different reasons Most commonly, candidates who failed had misallocated their time and did not balance their answers between the three requirements In a number of instances candidates had not developed their analysis sufficiently in terms of depth or breadth and therefore that section of the report also lacked sufficient judgement, conclusions and recommendations which led to a fail Review of professional skills in FS Assimilating and using information (A&UI) Almost without exception candidates provided good evidence of being competent under this heading manifested by good integration of AI and EP information and a clear use of relevant facts provided in the case and drawn from the identifiable wider context, such as the UKBA visa policy Structuring problems and solutions (SP&S) As always this was the core of the assessment and the majority of candidates demonstrated good analytical skills picking out the relevant factors, accurately calculating any impact, and considering and assessing the information which had been derived However, there were scripts with weak or incomplete analysis, in one or more requirements, and because this is the critical fulcrum of any section of the report, it is difficult for a candidate to recover from poor quality work in this area Applying judgement (AJ) Good candidates demonstrated the application of judgement with good evaluation of their analysis based on FS case information – this included appropriate professional scepticism Weak candidates struggled to demonstrate their judgement by failing to critically evaluate assumptions presented in the case material or to reflect on their own, frequently limited or incomplete, analytical assumptions Conclusions and recommendations (C&R) In most scripts the conclusions and recommendations flowed logically from the previous work in that section of the report and were of a high standard However, weaker candidates presented inadequate conclusions, and limited or no recommendations – commercial or otherwise Review of FS requirements Requirement was structured to start with the wider financial statement analysis of revenues and gross profit which then focussed in on one revenue stream and in turn on one client Most candidates demonstrated the required level of competence in performing the financial analysis of revenues and gross profit – helped by good preparation from the AI information Weaknesses were more apparent in the detailed review of receivables and cash relating to the T&I work and in the consideration of the specific problem caused by the slow paying client MP – these were components of the requirement which were less easy to pre-prepare As always in financial statement analysis, strong candidates demonstrated their professional competence Weaker candidates demonstrated a lack of analytical ability, and as a consequence this was combined with inadequate judgement and often banal conclusions – which are critical weaknesses in basic professional skills Requirement assessed the proposal to re-open the Banbury centre for ELT semester programmes The request from FS was to assess the contribution and cash flow impacts because, as one tutor firm accurately observed, “the original decision [to close – as shown in the AI] had muddled these elements due to the rental saving straddling the year-end” Candidates were also specifically asked to review and comment on the assumptions made Strong candidates provided comprehensive analysis and evaluation of the whole issue Weak students frequently did not provide clear analysis of the cash implications, as requested, nor did they develop their contribution analysis to consider a breakeven position or margin of safety for the semester programmes Their consideration of assumptions (AJ) was also very weak Requirement was a consideration of new opportunities which might arise as result of increased trading by FS clients, potential and actual, with Brazil Successful candidates presented a clear analysis of the benefits and risks involved, including the relevant ethical issues, demonstrating their professional competence Weaker candidates failed to provide an appropriately balanced consideration of the issues, by not considering all revenue streams or the different issues associated with the three companies identified in the EP These scripts were therefore weak on judgement and many had poor conclusions Overall and Executive Summary (ES) All reports contained appendices – the vast majority of which were clear and relevant Most reports contained an Executive Summary which covered all sections of the report indicating a structured, well-balanced and planned approach to answering the whole case The majority of scripts had a fairly even spread of marks between the three requirements with a slight bias towards Requirement and a slight bias against Requirement All successful candidates demonstrated the ability to assimilate, analyse and assess the information in the FS case and write a relevant appropriate report A small minority of the scripts showed evidence of time pressure – probably caused by poor planning Conclusion The examiners consider that FS was a topical case study, set in the current economic climate, against a background of the London Olympics which allowed good candidates the opportunity to demonstrate their professional skills in the answers It exposed the weaknesses of the poorly prepared candidate and those who could not think in situ in response to the specific issues included in the EP which had to be addressed in the case requirements This assessment should provide assurance to member firms that students, qualifying as ACAs, have been properly assessed and possess the range of skills and abilities required in the workplace Copyright ©The ICAEW 2012 Page of 19 CASE STUDY – NOVEMBER 2012 PART 2: THE CASE STUDY EXAMINATION Scenario for the paper (Advance Information) The case study relates to Fluent Speech Limited (FS), an owner-managed company operating in the language tuition and translation sector FS was created in 1993 by its four directors, who are equal shareholders The candidate is in the role of Charlie Monks, a final-year trainee Chartered Accountant working in the business advisory department of Griffiths Brett reporting to the engagement partner Enid Lightfoot FS is a new client Four weeks prior to the examination, candidates were provided with a 50-page package of information, containing a series of exhibits relating to FS These comprised 14 exhibits: You (Charlie Monks), your firm Griffiths Brett (GB), and 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 services 13 FS learning materials and examination fees 14 News articles Analysis of Advance Information (AI) By studying and analysing this Advance Information an overall picture of FS could be established (Additional commentary by the examiners is provided in italics and in brackets.) Exhibit provides a brief background to the candidate Charlie Monks, the firm Griffiths Brett (GB) Chartered Accountants and one of its clients, Fluent Speech Limited (FS) FS is an established business operating in the UK in the language training market It has three primary streams of revenue: English Language Teaching (ELT); Foreign Language Teaching (FLT); and Translation and Interpreting services (T&I) Exhibit gives a brief overview of language schools and the related UK industry background It introduces the legal and regulatory environment in the UK, including the UK Border Agency (UKBA) and Tier student visa entitlement It also identifies the issue of accreditation for those organisations providing ELT and the process by which this is carried out It further identifies the qualifications for teachers and for participants A short broad introduction to the business model for this type of organisation is also provided Exhibit is a short exhibit which provides information on the business, technical and linguistic expertise of the four directors of FS, who are also its only shareholders It also provides details of the main FS location in the Midlands, and the historical development of its three primary revenue streams Copyright ©The ICAEW 2012 Page of 19 CASE STUDY – NOVEMBER 2012 Exhibit provides information concerning the profile of FS students and clients by revenue stream ELT students comprise individuals from a variety of countries both in Europe and throughout the world ELT clients comprise employees of foreign owned commercial organisations which have bought into companies in the UK The majority of these client companies are in the motor industry which has a heavy concentration in the Midlands, but clients also include other industry organisations such as those in the pharmaceutical and computer software industry FS works with non-native English speaking managers at all levels offering a tightly targeted language programme to improve their general, and industry specific, English language expertise FLT clients comprise individuals who intend to work abroad and managers and employees from commercial organisations (predominantly in the motor industry) will be involved in visits, secondments or transfers abroad As with the ELT programmes the FLT programmes are clearly focused on the role and the industry in which the participants operate Initially the T&I work came from existing language clients but this has developed in breadth and scope Exhibit is an e-mail from Art Manor, the finance director of FS, to Enid Lightfoot with a business review of recent FS financial history This e-mail accompanies the FS management accounts for the three years 20092011 The review identifies the uncertainty in the ELT market caused by changes in the UK government policy on non-EU overseas student visas, which has led to a potential reduction in the numbers of the students able to attend programmes in the UK, with a particular impact on ‘marginal’ schools Despite the fact that FS is not a marginal school it has still been involved in a change of direction to a greater emphasis on foreign language work together with an increased focus on translation and interpreting work, this latter as a result of demand caused by the 2012 Olympics FS has been involved in upgrading its language facilities in its permanent locations but has also conducted a commercial review of other locations which are rented as additional teaching provision In the light of uncertain demand and "because of the expected need to conserve cash", Edwin Sanguine, the director of languages programmes, proposed that FS cancel one of its Banbury property rental agreements The financial details of the cancellation are provided (Although the figures provided are accurate, the decision is based on restricted criteria – immediate cash savings – which candidates could have, and should have, questioned and re-calculated using a broader and more relevant contribution and breakeven analysis) The review also identifies that the FS foreign language programme is in the process of recovery and growth as a result of similar recovery and growth in the motor industry T&I activity has increased significantly in 2011 as a result of work relating to the 2012 Olympics Exhibit provides pages of management accounts and notes, for the years to 30 September 2011 These accounts provide the following key information:            FS has achieved moderate overall revenue growth from 2009-2011 (circa 5% over the period) at a time of recession in the UK (The three primary revenue streams need further analysis to determine what has been happening – see revenue stream analysis below) Gross profit has varied over the three years but has remained above 40% (This is a solid performance; the modest variations may indicate changes in sales mix FS is performing consistently despite the recession) There are variations in the absolute level of FS administrative expenses over the three years (This variation may indicate possible weak FS control in 2010 but the situation appears to be back in line in 2011) Operating profit has been variable and in 2010 was significantly lower at £362k than the other years The percentage figures are: 2009 (7.7%); 2010 (4.4%); 2011 (9.0%) (This variation appears to have been an aberration as the subsequent recovery indicates that control has been re-established) The balance sheet shows that FS has a moderate investment in non-current assets (nothing remarkable in these figures: see Notes to the accounts below) The company holds small inventories (consistent with its information concerning sales of learning materials) There has been a large increase in level of accounts receivable in 2011 The ratios of accounts receivable to revenue are: 2009 (14.1%); 2010 (7.1%); 2011 (18.3%) (see below: this may indicate one or more of a number of causes: poor credit control; an alteration in the revenue mix; changes in the terms and conditions of activities; an alteration in seasonality or the timing of sales) Cash and cash equivalent balances appear adequate (see commentary on statement of cash flows) The level of accounts payable does not appear to be significant and the variations give no cause for concern (see below) Overall the balance sheet appears solid The statement of cash flows shows a variable level of cash being generated in the three years in line with revenue and cost variations in activity identified in the income statement above The company uses the cash to invest steadily in the purchase of non-current assets each year and to pay its taxes The company pays no dividends There are some variations in cash flow caused by changes in the collection of accounts receivable but in each year the company’s cash and cash equivalents balance at the end of the year is substantial and gives no cause for concern (This statement requires reading and understanding and should Copyright ©The ICAEW 2012 Page of 19 CASE STUDY – NOVEMBER 2012  be reviewed again after the information on the notes to the accounts has been assimilated One reason for the high year-end cash balances will be the fact that ELT students pay their semester fees in advance) From the Notes to the accounts the following information can be seen: o Revenue The detailed trends in primary and secondary revenue streams show the changing sales mix Over the three years there has been a significant decline in ELT revenues, a steady improvement in FLT revenues and a substantial increase in T&I revenues particularly in 2011 o Direct costs This note provides information which indicates the comparative margins on each revenue stream All revenue streams achieve gross margins above 50% with the ELT programmes being most consistent: 2009 (54%); 2010 (57%); 2011 (53%) FLT programme margins have declined: 2009 (62%); 2010 (54%); 2011 (51%) T&I margins have been improving slightly: 2009 (52%); 2010 (57%); 2011 (57%) o Administrative expenses have remained at a consistent absolute level over the three years (approximately £3,000k) with a higher figure in 2010 (£3,082k) which has been brought back down in 2011 (£2,974k) The three years provide information which shows that the two largest costs within this heading are salaries (including directors), which are rising steadily (to £973k in 2011), and hire of teaching and language facilities (£982k in 2011), which is declining in line with combined (ELT and FLT) teaching programmes (The fact that administrative expenses have remained somewhat static over time may indicate poor control but the individual expenses under this heading would need to be analysed The action taken by FS to terminate the rental of Banbury would have been a factor in reducing the cost of renting ELT facilities) o Non-current assets information is provided for all the three years since the beginning of October 2008 (there are no apparent large or unusual transactions or changes in patterns of expenditure during that time and the depreciation rates appear economically realistic o Accounts receivable show a consistent picture apart from a large increase in the T&I receivable in 2011 (£996k) by comparison with 2010 (£429k) (The pattern of trading activity and collection can be seen in detail in later exhibits (8 & 9) but this change indicates either poor credit control or changing terms and conditions, or timing of activity in generating revenue) o Accounts payable show that only a small amount of the total in accounts payable comprises trade payables (T&I = £146k out of £916k in 2011) Included in the figure are other payables and accruals taxation and social security and, importantly, a significant but declining figure for deferred income (this is a telling indicator of the future direction of the ELT semester programme) (As in any case study all the financial information should be read and fully analysed by candidates, ahead of the exam itself, in order to understand the detailed financial story and current financial position of the business) Exhibit is another e-mail from Art Manor to Enid Lightfoot which concerns the FS strategic review for 2012 together with additional detailed financial information about FS activities This “strategic review” is a compilation of the opinions of the FS directors from a board meeting in October 2011 – it identifies around 20 different items The discussion by the FS board was "realistic but broadly optimistic because, despite the recession, it was felt that the impact of the 2012 Olympics would be the major positive factor" (It should also be apparent that some are more likely, or plausible, than others – they are not of equal importance) Exhibit is the quarterly cash analysis for FS for the year to 30 September 2011 together with notes relating to the key items in the cash analysis It provides a detailed yet succinct financial summary of the years revenue and cost activities It can be seen to reconcile with the main headline figures in the management accounts (This is an important exhibit and candidates should have spent time studying and understanding it to identify and become familiar with the peaks and troughs of financial activity and the significant material items affecting the quarterly cash flows) Exhibit is a schedule of FS accounts receivable for the year to 30 September 2011 Brief explanatory notes are provided in order that this schedule can be reconciled with the relevant figures in the management accounts and the quarterly cash analysis shown in the previous exhibit It is a financial précis of the revenue streams (This is another detailed financial exhibit which provides a lot of information concerning the different revenue streams and the degree of control maintained over each stream Candidates should have analysed this exhibit and made sure they understood the key components and key financial messages which it contained) Exhibit 10 provides information concerning the FS English language programmes for speakers of other languages (ESOL) The information provided explains the various types of programme offered: executive, intensive and semester/long and the target audiences are for each different type of programme It also provides a breakdown of fees and costs based on its target minimum numbers for each category of programme (This exhibit provides an insight into the English language tuition activity in which FS is engaged and allows candidates to consider comparative contribution analysis for each category of programme This financial information can be reconciled approximately to figures in the FS management accounts) Copyright ©The ICAEW 2012 Page of 19 CASE STUDY – NOVEMBER 2012 Exhibit 11 provides information concerning the FS foreign language programmes This exhibit explains the various programmes offered mainly to executives and senior employees of multinational companies, based in the UK, prior to overseas placements or activities This exhibit also provides a breakdown of fees and costs for foreign language tuition for each category of programme based on minimum target numbers (From this information candidates can consider comparative contribution analysis for each category of language programme This financial information can be reconciled approximately to figures in the FS management accounts) Exhibit 12 provides information concerning FS translation and interpreting services (T&I) The exhibit details the standards which FS strives to adhere to; the historical development of this T&I work and the nature of T&I activity It also identifies the qualifications and standards expected of those individuals engaged by FS in T&I work Some very brief financial information is provided together with details of the split in activities and the cost structure for both translation and interpreting work (It has been identified that T&I activity has been increasing in recent years and it will continue to increase particularly in the period leading up to the 2012 Olympics Rates of pay and fees to clients are not fixed and depend on the complexity of the task and the timeframe or urgency of the work) Exhibit 13 is a brief exhibit which provides information on the two secondary streams of revenue: sales of learning materials and examination fees It earns the latter as an accredited assessment centre for English language and foreign language examinations both for its own students and as an examination centre for other candidates (This short exhibit is provided for completeness but it is clear that it is not possible to conduct any detailed financial analysis, such as the split of revenue, based on this information except to note that these two secondary revenue streams appear to provide a reasonable contribution for FS and that in 2011 their combined revenue exceeded any single primary revenue stream) Exhibit 14 comprises a series of news reports concerning different topical items     The first article (Exhibit 14a) deals with a highly topical and relevant issue: that of the withdrawal of college accreditation preventing it from sponsoring overseas students coming to the UK on a student visa to study English language, together with the knock-on effect on those individual students affected by this UKBA decision (This article covers in more detail an issue already identified in the AI which is the potential impact on the English language student market of the tightening up of UKBA rules for visas and college accreditation) The second article (Exhibit 14b) describes the result of research carried out into NHS language expenditure The research identifies that the NHS has spent significant sums in recent years on translation work Because of the sums involved and the current need to reduce NHS costs proposals are to being made to reduce this expenditure by a variety of different routes.(This article serves as a possible warning concerning the contraction of demand for T&I work by an organisation which is a current client of FS) The third article (Exhibit 14c) is a summary report on a UK Foreign Office trade fact-finding mission to Russia and Brazil whose aim was to promote future trade by UK organisations The article identifies the shortage of language specialists for both these countries (This article draws attention to the significance of the BRIC economies and the possible opportunities for a company such as FS to provide T&I support to organisations going into these markets It also draws attention to the different business practices and the difficulty of obtaining appropriately qualified, relevant linguists) The final article (Exhibit 14d) deals with the incident of an Olympic train poster reading like ‘gibberish’ to Arabic speakers because of the substitution of one font by another in the print process The security poster had been translated under a contract with FS who took responsibility for the error, apologised publicly – which was accepted – and took immediate remedial action at its own expense as well as not invoicing the train company for any of the work done (This article identifies a series of issues concerning the translation work: peak capacity; expertise and timeframe of the work all contributed to lower standards The problem is detrimental to FS and its reputation but the article also identifies the prompt steps taken by FS to manage and solve this problem: a good example of FS re-establishing business trust) Copyright ©The ICAEW 2012 Page of 19 CASE STUDY – NOVEMBER 2012 Information provided in the Exam Paper The Exam Paper information contained nine pages of additional information by way of six exhibits The new documents provided to candidates were:       Exhibit 15 – email dated November 2012 from Enid Lightfoot to Charlie Monks: Report for FS board Exhibit 16 – email dated November 2012 from Art Manor, finance director of FS, to Enid Lightfoot: FS Financial review 2012 and problems with translation and interpreting services Exhibit 17 – FS management accounts for the year ended 30 September 2012 (3 pages) Exhibit 18 – FS quarterly cash analysis and accounts receivable schedule for the year to 30 September 2012 Exhibit 19 – email dated 30 October 2012 from Edwin Sanguine to Art Manor together with related email to Enid Lightfoot Exhibit 20 – news article, together with an email dated November 2012 from Paz Trans to Enid Lightfoot Examination requirements You were required by Enid Lightfoot to prepare a draft report to the Board of FS dealing with following: 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 On the instruction page candidates are told that the report should be balanced across the three detailed requirements and must also include an executive summary The time allocation suggested to candidates was: Reading and planning Performing calculations and financial analysis Drafting the report hour hour hours With a total of nine pages of information to read in the Exam Paper, time should have been spent reading quickly through all the new material (Exhibits 15 – 20), in order to understand the range of information contained in those exhibits It would then have been essential to read Exhibits 15 &16 carefully to understand the requirements before starting a detailed read of the three pages of financial information provided in Exhibit 17 and the two additional pages of financial information in Exhibit 18 Using the new financial information it would then be essential to assess the 2012 results in the light of previous information and reflect on any preparatory analysis already carried out The exact financial analysis required focuses on a detailed evaluation of revenues and gross profit both overall and by revenue stream together with the impact of T&I services on movements in cash and accounts receivable Candidates also had to include in the analysis the MP problem identified by Art Manor Similarly assessing the new rental proposal for the BBP property meant assimilating the new information in Exhibit 19 and tying it back to the relevant information in the AI to perform an integrated calculation which would allow the additional contribution calculation and cash implications to be considered for Copyright ©The ICAEW 2012 Page of 19 CASE STUDY – NOVEMBER 2012 both years 2013 and 2014 However, candidates were also required to review and comment on the assumptions made by Edwin Sanguine and to explain their own assumptions The third requirement entails an assessment of the potential new business opportunities for FS arising from the market developments associated with Brazil, including the benefits and risks and any ethical concerns for FS With appropriate planning candidates should have been able to complete these three tasks, and write an executive summary, within the time available to produce a well-balanced report Analysis of Exam Paper (EP) information From reading the new exhibits candidates should have established that:      Exhibit 16 In his email Art Manor requests an analysis of the revenue and gross profit during the year to September 2012 by comparison with 2011 both overall and by reference to each of the three primary revenue streams He explains the broad change in FS activity during the year as a result of the 2012 Olympics and requests the analysis of T&I services on movements in cash and accounts receivable in the year to 30 September 2012, and in particular the problem with MP should be included A financial summary of MP activity is included (This is an exhibit which determines the financial analysis to be conducted This analysis should start with a broad review of revenues and gross profit and then gradually focus down through the analysis of the three primary revenue streams onto the impact of one of those revenue streams (T&I) on cash and accounts receivable, and within that revenue stream the activities of one client MP This requires a structured and disciplined approach to financial analysis.) Exhibit 17 This exhibit comprises three pages showing the management accounts for the year to 30 September 2012: an income statement; a statement of financial position and a cash flow statement, together with accompanying notes These notes include: details of revenues split into primary and secondary streams; similar details covering direct costs; a schedule of administrative expenses; details of the non-current assets; accounts receivable and accounts payable The 2012 set of accounts are presented in a similar format to the 2011 information presented in the AI (Exhibit 6) and should have posed no problem for any candidate to assimilate (This should have been a highly predictable exhibit – although the actual figures would not have been known in advance Analysis of the actual results to 30 September 2012 should have been anticipated and detailed analysis on AI figures was essential preparatory work) Exhibit 18 This exhibit comprises two pages showing the FS quarterly cash analysis for the year to 30 September 2012 and the FS accounts receivable 2012 The information shown in this exhibit is in a similar format to the information shown in the AI (Exhibits & 9) and should have meant that all properly prepared candidates would assimilate this information very quickly (Provided that candidates had done their preparatory work and made a point of understanding the equivalent exhibits in the AI then working through these summary financial schedules would have been straightforward and rapid - candidates were being clearly directed to the precise sub-section of this information which needed to be analysed) Exhibit 19 The email from Edwin Sanguine concerns the rental of the teaching facility near Banbury – where FS could run 12 of the semester/long English language programmes It is cross-referenced back to Exhibit where details of the cancellation of the original rental agreement were provided In his email Edwin identifies some of the critical criteria surrounding this decision together with details of the new rental proposal (£120,000 per annum payable in advance) to start in January 2013 Edwin also explains “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” (This email is a close parallel to information in the AI except that the decision is going in the opposite direction from that taken previously Provided that candidates had analysed the equivalent information in the AI carefully and had come to their own conclusions about the validity or otherwise of the basis of the decision taken by FS in the AI then this EP exhibit and the related requirement should have posed no problems.) Exhibit 20 This exhibit comprises a newspaper article which concerns a “Follow-up mission to Brazil”, the original visit having previously been described in the AI (Exhibit 14), together with an accompanying email from Paz Trans which identifies the related contacts being made with FS by potential and existing clients (This exhibit identifies different opportunities which might occur for FS as a result of these potential and existing clients’ new areas of activity in seeking trade in Brazil.) The information provided in the EP follows on from the financial and commercial story told in the AI FS total revenue has increased substantially but the individual revenue streams need to be analysed in order to determine what has been driving that growth Similarly direct costs have increased significantly and further activity stream analysis will be needed to identify what has actually occurred The inclusion of the quarterly cash analysis and accounts receivable schedules and the details provided concerning the client MP means that the financial information provided to 30 September 2012 will enable comprehensive but tightly focused financial statement analysis to occur – a basic professional skill and one which candidates must demonstrate The Copyright ©The ICAEW 2012 Page of 19 CASE STUDY – NOVEMBER 2012 calculation of the impact of the new Banbury proposal in terms of both contribution and cash and the need to review and comment on the assumptions surrounding this proposal requires structured financial data analysis together with a focus on applying judgement to this issue The evaluation of the potential new business opportunities for FS arising from the market developments associated with Brazil across its three primary revenue streams considering all the benefits and risks and any possible ethical concerns requires a structured review of those revenue streams against the potential and existing client possibilities This review of the opportunities includes a sceptical and ethical review of the issues The individual requirements clearly describe the detailed process of analysis which should be followed in developing the report For Requirement the financial statement analysis of the management accounts for FS for the year to 30 September 2012 had to be focused on specific key features The required analysis is detailed in Exhibit 16 which spells out clearly how the analysis is to be conducted For the 12-month income statement the analysis should be of revenue and gross profit, both in total and across the three primary revenue streams The cash and accounts receivable, including the MP problem, should concentrate on the T&I revenue stream only This financial analysis should have been a straightforward exercise numerically, but it then had to be developed with a clear commentary based on that numerical analysis Requirement requires some basic financial data analysis to calculate the additional contribution as well as the cash implications of the new rental proposal, as identified by Edwin in Exhibit 19 Given that there are some question marks over the previous decision to stop renting the Banbury premises – largely because the information straddled the year-end and that decision was subject to analysis on the basis of short-term cash criteria only – candidates should have already been alerted to this type of issue in their preparatory analysis Candidates were also made to focus on the assumptions provided by Edwin as well as explain any other assumptions they might make – this focus was made with the intention of requiring candidates to clearly display their judgement Requirement requires a balanced analysis of the opportunities for FS arising from the market developments associated with Brazil This analysis should focus on the three business organisations, two potential clients and one existing client, who have contacted FS concerning these opportunities and should consider the potential across its three primary revenue streams The most important aspect of this analysis is to focus the analysis and consider the potential revenue from these three different types of client organisation It is also clear that the analysis by revenue stream should make candidates consider which streams are likely to benefit from this new opportunity Candidates had to identify and evaluate the benefits and risks and assess the possible ethical issues by an integrated review of AI and EP information Copyright ©The ICAEW 2012 Page 10 of 19 CASE STUDY – NOVEMBER 2012 Requirement 2: Assessment of Banbury rental proposal This topic assessed the candidates’ ability to assess the proposal to re-open the Banbury centre for ELT semester programmes The request from FS was to assess the contribution and the cash flow impact of this proposal for the two years to 30 September 2013 and 2014 The calculation required candidates to use information from the EP provided by Edwin Sanguine and basic data relating to these programmes provided in the AI This basic data had been provided in the AI as part of an explanation concerning the decision to close the Banbury location in order to save cash The problem, which should have been identified by candidates as part of their preparatory work, was that the decision to close Banbury – which was taken in the context of UKBA rules tightening and possible falling recruitment – had been based on partial, very short-term, cash criteria only (Candidates who had spent preparatory time reflecting on this issue may well have arrived at the conclusion that the original decision could have been wrong) Weaker candidates made a whole variety of errors in terms of their understanding of the basis of the question, the difference between cash and accrual accounting, and basic mathematical errors Many believed that the figures for 2013 and 2014 would be identical and reproduced the same numbers twice – by a stroke of fortune in some cases the 2014 figures (which were less problematic) were then correct Some did the whole calculation over five semesters without bothering with the impact on different financial years Others could not distinguish between contribution and cash analysis and provided just one figure (either/or, but frequently an amalgam of both criteria) as the answer to the problem Other candidates picking up numbers from the AI used the total revenue from the semester programme of £1,555,200 (per Exhibit 10 presumably) rather than the just the revenue from the semester programmes which could be run in Banbury of £155,520 (per Exhibit 5) per semester The result in all these instances was a very weak starting point for candidates for this section of the report A more universal weakness across most scripts was that the contribution analysis provided in answers was not extended by taking the simple expedient of calculating the next step, which was to identify the break-even point in student or class numbers and/or the margin of safety in order to determine and discuss the financial risk of this proposal The requirement also emphasised that candidates should “review and comment on the assumptions made by Edwin in Exhibit 19 and explain any other assumptions you make” This was an attempt by the examiners to force candidates to demonstrate how they applied judgement to the information provided and/or how they had used judgement in selecting their own analytical factors Good candidates showed clear judgement in evaluating Edwin’s assumptions concerning: the oversubscription to the semester programme (by how much?); the factors affecting the oversubscription (FS previous closure of Banbury or the closure of rival colleges); the efficacy of the review of demand (who did this review, when and how?); the starting date of January 2013 (how plausible was this given the current date of November 2012?) the figure for the new rent agreement and the timing of payment Weaker candidates failed to identify all (or any) assumptions and simply breezed past this aspect of applying judgement in this requirement to their detriment Some correctly picked up on an assumption but then did not really conclude appropriately “The January course may not be possible as this would allow very little preparation/modification time before the course starts It is assumed that the January course will run, but this is uncertain and FS should calculate the impact of it not running.” (Maybe the candidate should be calculating the impact of not running this course for the client rather than telling the client to it!) This requirement, which had been considered by examiners to be straightforward, and which had clear and unambiguous criteria, had the widest spread of results of all requirements Good candidates demonstrated their skills in all aspects of this section of their report, but weak candidates stumbled through the requirement – which could have been due to a failure to adequately prepare for the simple calculations and/or an inability to think carefully on the day – for whatever reason their answers were patchy and of a very poor standard Requirement 3: Evaluation of new business opportunities Requirement was a consideration of new opportunities which might arise as result of increased trading by FS clients, potential and actual, with Brazil Successful candidates presented a clear analysis of the benefits and risks involved, including the relevant ethical issues, demonstrating their professional competence Weaker candidates failed to provide an appropriately balanced consideration of the issues, by not considering all revenue streams or the different issues associated with the three companies identified in the EP These scripts were therefore weak on judgement and many had poor conclusions The review was to be focussed on the benefits and risks involved, including the relevant ethical issues and should consider opportunities both in Brazil and the UK The starting point was that FS was being approached by client organisations, potential and existing, in order to discuss this work Initially this required a review of Copyright ©The ICAEW 2012 Page 15 of 19 CASE STUDY – NOVEMBER 2012 each of these organisations and a reflection on which FS business stream might benefit most It should very quickly have been apparent that it would be the T&I stream that would be the most appropriate with the possibility of some Brazilian-Portuguese FLT for some of the clients’ employees There would be little or no need for the ELT programme and the vast majority of the future opportunity would be in the UK helping clients prepare documents and people for work in Brazil – with the possibility of some interpreting work in Brazil in support of client visits This is the way in which FS currently operates with its current corporate clients and as such would be playing to its operational strengths (FS does not have a chain of overseas language schools and it would be unwise to step into that market in Brazil when it has no experience or expertise and would be facing unknown local competition.) The three organisations each offer different opportunities with different risks attached The best opportunity lies with the existing client XL Auto-components because there is already a good client history and it would be a case of working with them but focussing on a new language The next best opportunity is with R-comp because FS already works with other software companies and component type organisations so it has experience of similar products and there is a strong opening because R-comp has previously experienced poor translation work elsewhere – and is looking for that work (translation) to be done properly R-comp also appears to be a company with a relevant valuable product for a transitional economy The last of the three “opportunities” lies with Accredita plc This financial services organisation deals with an unfamiliar product for FS (Although it is a large locally based organisation its ethos as expressed by Lynne Burroughs may verge on the unethical for FS) However some candidates made completely unfounded comments concerning Accredita: “There is a risk of slow payment or non-payments from new clients Accredita seems large with 700 staff this will have negative effect on cashflow and increase receivables.” Many weaker candidates failed to identify and address the main ethical issues identified in both the AI (the use of commissions’ and different business practices or standards) and the EP (associating with organisations which might try to exploit the level of sophistication of their customers, the passing off of a level of expertise in a language which FS does not possess) in an appropriate manner Most of the weaknesses evident in answering this requirement suggested poor strategic thinking, poor judgement and inappropriate conclusions or recommendations (Many demonstrated narrow preparation based on business models that were not in accordance with the specifics of this case: the suggested use of joint ventures by FS for these opportunities, the opening of language schools in Brazil, the issue of hedging – which were not appropriate issues.) Appendices and overall paper All reports contained appendices – but some were weak and poorly labelled Most appendices were clear and relevant as well as being properly labelled which demonstrated good preparation and the majority of candidates made appropriate use of their numerical work As always some candidates produced their own idiosyncratic or incomprehensible schedules which attracted little credit There was still some evidence of excessive financial analysis in the appendix for Requirement – re-writes of previously prepared schedules which must have wasted these candidates’ valuable time including secondary revenue stream calculations – but these were relatively rare The appendix relating to Requirement was more variable in standard because candidates had to decide their own format Most candidates produced a well-structured document and also wrote sufficiently clearly and legibly Most scripts met the requirements and were appropriate for board use, but a significant minority made statements which added no value and which the board would not have considered appropriate Conclusion The majority of scripts were written clearly and legibly and had an even spread of marks between the three requirements with a slight bias towards Requirement and a slight bias against Requirement Overall most candidates produced a well-structured document, with a balanced and planned approach to answering the requirements and their answers were appropriate for board use However a significant minority made statements which added no value and which the board would not have considered appropriate for their use Most candidates who failed did so because their answers to requirements were incomplete either by not addressing the issue fully in the manner requested or failed to provide evidence of their professional skills – usually in the AJ section A number of scripts were weak as a result of poor exam technique by not planning their time appropriately such that they failed to finish a requirement and/or the Executive Summary Candidates must remember that in order to pass the Case Study they are expected to achieve a majority of competent grades across the paper – doing very well in one section will not “carry” a candidate to an overall pass As always, the top scripts provided really impressive answers with little superfluous or irrelevant information – these were a delight to read Copyright ©The ICAEW 2012 Page 16 of 19 CASE STUDY – NOVEMBER 2012 Fluent Speech Limited Appendix (a) change 2012 change 2011 Total £000s £000s £000s £000s Revenue 1,798 10,503 393 8,705 Direct costs 1,716 6,662 78 4,946 Gross profit 82 3,841 315 3,759 Analysis of revenue and GP % gross profit 37 43 - Large increase in revenue £1,798 (20.6%) - More than matched by increase in direct costs £1,716 (34.6%) - As a result GP increase small in absolute terms £82K (2.18%) - GP Margins squeezed because of impact of change in sales mix - Very small inventory / WiP involved English language programmes Revenue (161) 2,314 (437) 2,475 Direct costs (137) 1,186 (336) 1,323 Gross profit (24) 1,128 (101) 1,152 % gross profit % of total revenue 49 22 47 28 - Revenues decline in year 6.5% (because of UKBA policy?) - FS management decision reduced capacity by 10% - GP Very small change in absolute terms but margins have improved - No inventory / WiP involved Foreign language programmes Revenue 295 2,029 300 1,734 Direct costs 136 1,023 110 887 Gross profit 159 1,006 190 847 % gross profit 50 49 % share of revenue 19 20 - Very small change, margins improved Translation & interpreting Revenue 1,536 3,339 718 1,803 Direct costs 1,516 2,548 414 1,032 20 791 304 771 % gross profit % share of revenue 24 32 43 21 - Huge increase in revenue up by £1,536 (85%) on 2011 - Matched by increase in related costs £1,516 (147%) over 2011 - Margins squeezed hard by increase in costs of the translation/interpreting work Copyright ©The ICAEW 2012 Page 17 of 19 CASE STUDY – NOVEMBER 2012 Fluent Speech Limited Appendix (b) Analysis of Cash changes and Accounts Receivable for T&I Translation and interpreting clients Op Bal Rev Receipt Bad Drs Cl bal £000s £000s £000s £000s £000s Existing clients 550 870 (1,032) (64) Other translation clients 444 1958 (785) 1,617 511 (140) 373 996 3,339 (1,957) Cash flow Q1 Q2 Receipts 623 Payments Accounts receivable Other interpretation clients Subtotal MP analysis Invoiced Received Outstanding @ year end Copyright ©The ICAEW 2012 324 (64) 2,314 Q3 Q4 Total 554 519 261 1,957 597 578 617 705 2,497 26 (24) (98) (444) (540) Q1 Q2 Q3 Q4 Total £000s £000s £000s £000s £000s 240 625 872 92 100 192 - 680 Page 18 of 19 CASE STUDY – NOVEMBER 2012 Fluent Speech Limited Appendix English language programme costs (Per Exhibit 10) Contribution calculation Long (12 week; students) Summary contribution Fees Direct costs: 110% Tut Total revenue per prog £ Direct Cost = Tut £ Contribution per prog £ 12,960 7,500 5,460 Either 12,960 7,500 5,460 % Direct Cost 110% Tut £ Contribution per prog £ % 42.1 8,250 4,710 36.3 Or 12,960 8,250 4,710 New rent possibility 2012/2013 onwards – (i) Contribution / surplus Contribution: 12 programmes x (sem) Cost of renting (pro-rata) Surplus 2013 £ 131,040 (90,000) 41,040 New rent possibility 2012/2013 onwards – (ii) Cashflow 2013 £ Contribution (as above) 131,040 Rent paid (120,000) Net cash 11,040 Annual breakeven Annual rent Contribution per programme (as above) Number of programmes Copyright ©The ICAEW 2012 Either 120,000 5,460 22.0 110% 110% 2013 £ 113,040 (90,000) 23,040 2013 £ 113,040 (120,000) (6,960) sem sem 2014 £ 169,560 (120,000) 49,560 2014 £ 169,560 (120,000) 49,560 Or 120,000 4,710 25.5 Page 19 of 19 NOVEMBER 2012 - FLUENT SPEECH LIMITED First Marking DATE CANDIDATE NO TIME MARKER NUMBER ES Req Req Req Overall TOTAL 10 10 10 40 CC SC IC ID NA Total SUPERVISOR SIGNATURE CHECKER SIGNATURE Changes made? ID = Insufficiently Demonstrated IC = Insufficiently Competent SC = Sufficiently Competent CC = Clearly Competent Executive summary FS Financial analysis / Myanmarpic2012 Assessment of Banbury rental agreement Overall FS revenue and GP (comments and numbers) 2013 financial impact (number) Primary stream revenue and GP (comments and numbers) 2014 financial impact (number) Comment on change in revenue mix Considers B/E / sensitivity Impact of T&I / MP on receivables (comment and number) Summarises main business issues (eg oversubscribed / visa changes) Impact of T&I / MP on cash (comment and number) Identifies main assumptions (eg timescale / courses fully booked) NA ID IC SC CC NA ID IC SC CC Evaluate importance of quality to reputation / accreditation Evaluates impact on cash Evaluate impact of UKBA visa changes: students / colleges Other factors (eg low margins, increased business risk) Evaluate T&I contracts: fixed pricing / costs / terms / controls Challenges assumptions Evaluates / recommendation on MP Concludes on whether to proceed Makes commercial recommendations Makes commercial recommendations NA ID IC SC CC NA ID IC SC CC Evaluation of new business opportunities Identifies main benefit (diversify / build on existing business / fits FS strategy) Identifies main risk (B-P linguists / quality / impact on existing business) Comment on XL Auto / R-comp / Accredita Comment on impact on T&I / FL Comment on potential revenues / costs / margin / cashflow NA ID IC SC CC Need to replace Olympics work B-P work provides good opportunity Concludes on way forward Concludes / recommends on ethical issues Makes commercial recommendations NA ID IC SC CC CC SC IC ID NA Total REQUIREMENT - FS Financial analysis / Myanmarpic2012 ASSIMILATING & USING INFORMATION STRUCTURING PROBLEMS & SOLUTIONS Uses relevant AI & EP information Financial analysis on revenue Revenue: FS (+£1,798k / 20.7%) / (EL-6.5%, FL 17%, T&I 85%) FS overall revenue: good growth Revenue mix: EL (22%), FL (19%), T&I (32%) FS mix (%): EL (less significant) / T&I (more significant) GP: FS (+£82k / 2.2%) / GP%: FS (37%) / GP/% by stream EL revenue: reduced Banbury capacity Total receivables: up £1,363k / 85% FL revenue: growing motor sector / expertise / location Total cash: down £343k / 37% T&I revenue: growth driven by Olympics NA ID IC SC CC NA ID IC SC CC Identifies business issues and wider context Financial analysis on gross profit Recession: student disposable income / corporate cost cutting FS overall GP: very small increase UKBA visa policy: colleges closing / total student numbers down FS overall GP%: down (37% v 43%) Motor industry strengthening / inward investment EL GP% up (49% v 47%): costs controlled / Banbury low GP Olympics: one-off / non-recurring work FL GP% stable (50% v 49%): little change / costs controlled Quality problem (Arabic) / bad publicity in year / reputation T&I GP% down (24% v 43%): high staff costs / fixed prices Own research - Hitachi / Ford - London Met / college closures - NA ID IC SC CC Impact of T&I on receivables and cash Total/T&I receivable days up NA ID IC SC CC T&I receivables up £1,318k / 132% T&I receivables 78% of total T&I overall cash outflow £540k / Q4 outflow £444k Payment terms: translators 30 days v receipts 60+ days NA ID IC SC CC APPLYING JUDGEMENT CONCLUSIONS AND RECOMMENDATIONS Evaluation of financial analysis on revenue / GP Draws conclusions (under a heading) Visa policy: reduced competition / good for FS Good overall revenue increase Growth in secondary streams linked to primary streams Minimal overall GP increase / GP% decline Fixed price T&I contracts may be underpriced Concludes on individual primary stream performance Shortage of linguists has increased T&I costs Significant increase in receivables caused by T&I / MP Overall GP% decline: sales mix change / T&I lowest GP% Decline in cash / healthy cash balance Changes in course mix will impact EL/FL GP/% NA ID IC SC CC NA ID IC SC CC Evaluation of T&I on receivables and cash Makes recommendations Timing of Olympics has impacted T&I y/e receivables Improve credit control Existing T&I clients well controlled (only small bad debt) Review trading terms T&I largely responsible for decline in cash Review pricing of fixed price contracts T&I payment terms adversely impact cashflow / WC cycle Contact MP: resolve quality issues / agree payment schedule Most T&I costs paid: benefit next year / no further decline MP impairment review needed Sufficient cash balance to cope with cashflow timings Improve quality control NA ID IC SC CC Other recommendations Evaluation of MP on receivables and cash MP invoiced £872k / received £192k / outstanding £680k MP receipts £192k v costs paid £654k / outflow £462k NA ID IC SC MP reasons: poor quality work / exchange controls CC Poor commercial control: quality checks / credit control SC IC ID If issues resolved may still be paid in full NA Total Any AR impairment will impact profits NA ID IC SC CC 10 CC REQUIREMENT - Assessment of Banbury rental proposal ASSIMILATING AND USING INFORMATION STRUCTURING PROBLEMS & SOLUTIONS Uses relevant AI / EP information Calculation of 2013 financial impact Revenue (per semester £180 x 12 wks x stdts x 12 progs) No of semesters = Tutor costs (£25 x 25 hrs x 12 progs x 12 wks = £90,000) Contribution £113,040 (£56,520 x 2) / £131,040 (£65,520 x 2) Supervision costs (10% of tutor fees) Rent £90,000 Cash impact: rent payable in advance on January Financial impact £23,040 / £41,040 Cash impact: student fees payable in advance NA ID IC SC CC NA ID IC SC CC Describes business issues and wider context Calculation of 2014 financial impact EL courses currently oversubscribed No of semesters = Banbury closed: anticipating UKBA downturn / to save cash Contribution £169,560 (£56,520 x 3) / £196,560 (£65,520 x 3) R1 shows FS not badly affected by visa restrictions Rent £120,000 Trend is to shorter/online courses Financial impact £49,560 / £76,560 Rent increased by £30k Own research NA ID IC SC CC Comments on assumptions NA ID IC SC CC Starting mid academic year / in Jan may be a problem (already in Nov) Courses may not be fully booked May be further changes to UKBA rules FS may lose its visa accreditation / importance of continued QC Rent may be fixed / variable NA ID IC SC CC APPLYING JUDGEMENT CONCLUSIONS AND RECOMMENDATIONS Evaluation of impact on cash Draws conclusions (under a heading) FS has sufficient cash available for rent Concludes on financial impact for both years Other start-up/running costs may be needed eg marketing Concludes on cash impact Compares timings of cashflows (fees, variable costs, rent) Caution needed re assumptions Minimal/negative cashflow up to 30 Sept 2013 Concludes on B/E / sensitivity Positive impact on cashflow from 2014 Concludes on whether to proceed Cash will be impacted by changes in assumptions NA ID IC SC CC NA ID IC SC CC Impact of other important factors Makes recommendations Semester EL programme is lower margin Market research needed on likely student numbers Additional contribution will arise from secondary streams Review revenues and costs for accuracy Considers annual B/E point / sensitivity analysis Consider other use of Banbury property (in Qtr 4) Increased business risk (rent must be paid in any event) Negotiate rental terms / consider other locations Cheaper/more appropriate locations may be available Start recruitment of students / tutors immediately Reputational impact of Banbury closure / reopening Consider delaying start date NA ID IC SC CC Other recommendations Uses professional scepticism Unknown level of oversubscription Unknown validity of 'review of demand' NA ID IC SC Assumes fees remain unchanged CC Assumes tutor/other costs remain unchanged over years SC IC ID NA Assumes sufficient tutors etc available Total Unknown competition / colleges reopening NA ID IC SC CC 10 CC REQUIREMENT - Evaluation of new business opportunities ASSIMILATING & USING INFORMATION STRUCTURING PROBLEMS & SOLUTIONS Uses AI & EP effectively Benefits Fits with FS strategy New geographical market for expansion Diversify into new language (B-P) FS has been approached by companies Industry expertise: build on existing / develop new XL Auto: motor industry / existing client Potential to add to client base / identified companies are local Builds on FS's good reputation R-comp: IT / potential client Replacement revenue for one-off Olympics work Accredita plc: financial services / potential client NA ID IC SC CC NA ID IC SC CC Describes business issues and wider context Risks Previous quality issues FS / R-comp FS has no experience in B-P / reliant on B-P linguists Shortage of UK-based native B-P linguists Brazil is part of buoyant BRIC economies Use of E-P linguists may result in quality issues Brazil is hosting World Cup / Olympics Lack of technical language skills (eg financial services) Management may be stretched / impact on existing business Brazil is a huge potential market Brazil: culture / time zone / location / forex Continuing global recession impacting business Own research - St Giles - HIG Capital - NA ID IC SC CC Ethical issues FS shouldn’t overstate expertise in B-P NA ID IC SC CC Must comply with EU/UK rules on "commissions" Unsure of Accredita's business practices Unethical to reduce quality standards away from UK Unknown Brazilian regulatory environment (eg financial services) NA ID IC SC CC APPLYING JUDGEMENT CONCLUSIONS AND RECOMMENDATIONS Evaluates three business opportunities Draws conclusions (under a heading) XL Auto - will strengthen existing relationship Potential benefits high XL Auto - risk of losing existing client Good timing - surplus mgt time / replacement revenue R-comp - previous poor experience gives FS opportunity Concludes on main risk R-comp - Edwin has IT experience Concludes on ethical issues Accredita - large plc / large new market identified Concludes on way forward Accredita - possible reputational risk of association NA ID IC SC CC NA ID IC SC CC Evaluates impact on primary revenue streams Makes recommendations T&I work initially / appears to be main revenue stream Recruit B-P linguists FL work could develop from T&I work Ensure B-P linguists have appropriate qualifications Build on expertise in executive FL courses / high margin Establish quality control procedures for new work Limited opportunity for EL work (export led) Follow up on leads identified / contact other potential clients Good to be an 'early mover' Accurate forecasts / planning / pricing needed Build on experience of international events Other recommendations NA ID IC SC CC Professional scepticism NA ID IC SC Revenues / costs / margins currently unknown T&I work may impact adversely on cashflow timings Short supply of B-P linguists increases costs CC SC IC ID NA Total Lack of B-P linguists could limit opportunities Reputational risk arising from poor quality Article may be optimistic / benefits may never arise NA ID IC SC CC 10 CC Appendices Main Report Appendices R1: Content and style Report: Structure Tabulated and mix of £s and %s Sufficient appropriate headings Revenue and GP calculations by stream Appropriate use of paragraphs / sentences T&I accounts receivable / cashflow Legible MP accounts receivable / cashflow Correctly numbered pages NA ID IC SC CC NA ID IC SC Appendices R2: Content and style Report: Style and language Logical approach and numbers clearly derived Needs disclaimer (external report) Well presented and labelled Suitable (formal) language for audience Calculates contribution for 2013 and 2014 Tactful / ethical comments Calculates B/E / sensitivity / cashflow Reasonable spelling / grammar NA ID IC SC CC NA ID IC SC CC SC IC ID NA Total CC CC ... the workplace Copyright ©The ICAEW 2012 Page of 19 CASE STUDY – NOVEMBER 2012 PART 2: THE CASE STUDY EXAMINATION Scenario for the paper (Advance Information) The case study relates to Fluent Speech.. .CASE STUDY – NOVEMBER 2012 PART 1: EXECUTIVE SUMMARY Introduction This report covers the November 2012 Case Study exam It is issued in conjunction with... despite many token, rather than considered, references to the 2012 Olympics Copyright ©The ICAEW 2012 Page 14 of 19 CASE STUDY – NOVEMBER 2012 Requirement 2: Assessment of Banbury rental proposal