CASE STUDY – NOVEMBER 2010 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 15 Requirement 1: Review of EEE’s 2010 financial performance 15 Requirement 2: Proposal to expand into Australia 17 Requirement 3: Strategy for increasing revenue from solar panels 17 Overall paper 18 Part 4: Appendices Appendix 1: Analysis of 30 September 2010 financial statements 19 Appendix 2: Calculation of profitability from total 5-year Australian project 24 Part 5: Marking Key © The Institute of Chartered Accountants in England and Wales 2010 Page of 28 CASE STUDY – NOVEMBER 2010 PART 1: EXECUTIVE SUMMARY Introduction This report covers the November 2010 Case Study exam It is issued in conjunction with two illustrative scripts and related Examiners’ commentaries The first script was in the 2nd 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 ‘bad’ or uniformly ‘good’ A successful script will present appropriate coverage of all requirements but may include errors of calculation or logic; an unsuccessful script may contain one appropriate section and/or some good points but be let down by poor or incomplete text elsewhere Unsuccessful candidates will also find key points from the November 2009 and July 2010 Examiners’ Reports, together with guidance in the Case Study Manual which forms part of the ICAEW Learning Materials and includes specific chapters on Introductory Financial Analysis and Ethics 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 In addition, the Examiners have provided an appendix on ethical issues, reflecting the increased emphasis on ethics (including professional scepticism) in the Case Study exam Overview of performance 76.0% of all candidates sitting the paper passed, compared with 78.7% in July 2010 and 73.3% in November 2009 The pass rate reflects the fact that, as well as the competence in performing the financial analysis in Requirement 1, there was a general improvement in performing basic analysis for Requirement – although among weaker candidates there was a noticeable failure to identify the economic benefits and risks requested Requirement provided clear differentiation with strong candidates demonstrating their competence but weaker candidates failing to provide appropriate consideration of the specific issues they were required to address In both Requirement and Requirement 3, the performance of candidates in dealing with issues of professional scepticism and ethical issues was of variable standard, particularly by weaker candidates The Eastern Energy Experts Limited (EEE) case concerns an owner-managed company working with a major power supply company, providing insulation installation advice and services to households based in the East of England This work, which is dependent on indirect funding from the UK government through UK power companies, is part of the UK government’s commitment to reduce UK carbon emissions under the Kyoto accord EEE is also involved in the alternative energy supply business For its insulation work, EEE works closely with Anglo Eastern Power Supply (AEPS) a subsidiary of Global Power Supply (GPS) a major international operator EEE was created in 2005 specifically to take advantage of government incentives for energy conservation It is owned by its four directors who have equal shares in the business and are all involved heavily in company operations From the Advance Information (AI) it can be seen that the company has been financially very successful in its first four years of operations – up to 30 September 2009 – generating significant profits, and that the directors have received a good return on their original investment by way of a stream of large dividends, as well as their salaries The business operates with a number of business activities: a call centre which generates commission revenue from contacting potential customers and signing them up for insulation installation contracts; the insulation operation which is delivered by both own labour and significant numbers of sub-contractors; and the sale of alternative energy products – particularly solar panels From the AI it can be determined that the call centre and the installation of insulation operations are heavily dependent on each other From the information concerning potential market size and the success rates for signing up customers and installing the insulation, it is possible to determine that this insulation project is coming to an end Sales of solar panels have been increasing since 2005 and, from information provided in the AI (and massive UK government publicity), are expected to surge from April 2010 as the government pushes its Feed in Tariff schemes for households which install solar panels as an alternative energy supply The EEE case requirements in the Exam Paper (EP) followed on from the information provided in the AI They comprised: (1) an analysis of the 12 month financial statements to the 30 September 2010 against specifically defined yardsticks (the results for each of the business activities against the prior year and the cash flow statement for the year); (2) an analysis of the proposal to consider expanding the EEE insulation installation business into Australia, and; (3) an assessment of the economic benefits and risks relating to EEE’s proposed strategy to develop its business from solar panel sales and solar panel installation in the UK In the exam rubric, © The Institute of Chartered Accountants in England and Wales 2010 Page of 28 CASE STUDY – NOVEMBER 2010 candidates were specifically told that an executive summary was to be provided and that the report should be balanced between the three elements Tutor firms have commented that for candidates “this case study was straightforward” and “a reasonable paper” The Examiners concur with these views 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 The majority of scripts were balanced, clear and focused; dealing with the requirements set, and had an average length of 23-27 pages (including approximately 4-6 pages of appendices) Candidates who failed did so for a variety of reasons As always, a significant number failed because of poor exam technique either by not planning their time appropriately such that they failed to finish a section or the executive summary; or by not answering the overall paper in sufficient detail For others the reasons for failure rested within each requirement, perhaps with the misguided belief that a strong performance in one section of the report would shield a weak performance elsewhere The normal criteria for passing the Case Study remain achieving a majority of competent grades in all sections of the report Requirement assessed the fundamental skill of financial statement analysis Weak candidates provided poor overall analysis of the income statement such as by not looking at absolute figures and only providing percentage changes without providing a yardstick figure for comparison There was also a failure to properly analyse the cash flow statement In the case study exam, failure to perform well in this key requirement is closely correlated to failure overall However performing well in this single requirement is not a guarantee of success, and this was especially true of those who continued for too long with their analysis and failed to manage their time and balance their report As always in this type of financial statement analysis, strong candidates demonstrate their fundamental competence, while weaker candidates provide poor judgement and often banal conclusions which demonstrate a fundamental weakness in a vital basic professional skill Requirement assessed the candidates’ ability to perform financial data analysis by considering the proposal to expand the EEE’s insulation operation to Australia by way of a similar project linked to another GPS subsidiary in Victoria This required a straightforward analysis of a proposal similar to the existing UK operation and strong candidates performed well in this requirement Most candidates demonstrated their competence in the basic calculation but many stumbled with the sensitivity analysis requested concerning success rates and possible Aus $:£ exchange rate movements Weaker candidates also failed to demonstrate sufficient professional scepticism concerning the numerical information supplied and assumptions made, as well as having difficulty identifying opportunities and threats (with solutions) Requirement assessed the candidates’ skills in strategic analysis and ethical considerations The answers by weaker candidates to this requirement were often very thin and did not cover the necessary aspects of the requirement In particular their strategic review was focused too heavily on general issues and did not take into account what was actually requested concerning the economic benefits and risks of EEE’s strategy concerning solar panels In addition many weaker candidates failed to identify and address the ethical issues identified in the EP in a balanced and appropriate manner Apart from evidence of poor time management, the weakness in this requirement provided evidence of poor preparation and a general naivety concerning how to deal with these sorts of problematic issues from a real life and professional perspective As in most case study exams the majority of candidates planned their work and wrote a balanced answer to the EEE case There were a large number of scripts with an even spread of good marks right through to the very top end, and, as always, the top scripts provided impressive answers This indicates the ability by the majority of candidates to assimilate, analyse and assess the information in the EEE case and write a relevant appropriate balanced report Overall the range of grades was as wide as in previous case study exams A minority of the scripts for the EEE case showed evidence of poor time management Overall the examiners consider that EEE was a relevant case, with highly topical elements which allowed good candidates the opportunity to demonstrate their skills It exposed the real weaknesses of the under-prepared candidate and those who did not manage their time appropriately, as well as those who did not demonstrate adequate professional skills in their answers As was stated by one of the tutor firms: “the current format [of the case study] of financial statement analysis, financial data analysis and a more discursive requirement should give great comfort to member firms that students, qualifying as ACAs, possess the range of skills and abilities required in the workplace” © The Institute of Chartered Accountants in England and Wales 2010 Page of 28 CASE STUDY – NOVEMBER 2010 PART 2: THE CASE STUDY EXAMINATION Scenario for the paper (Advance Information) The case study relates to Eastern Energy Experts Limited (EEE), an owner-managed company engaged in working with a major power supply company, providing insulation installation advice and services, which also supplies alternative energy supplies It is located and operates in the east of England Four weeks prior to the examination, candidates were provided with a 46-page package of information, containing a series of exhibits relating to EEE These comprised 14 exhibits: About you (Adie Maynard), your firm (Gunter Jensen LLP) and your client (Eastern Energy Experts Limited) The Kyoto accord and its implications for UK carbon emission control Eastern Energy Experts Limited client file extracts: history and structure Eastern Energy Experts Limited client file extracts: operations Letter from Jo Carey (EEE MD) to Sukanta Woolf (GJ) EEE management accounts: Summary for the years ended 30 September 2009 Email from Bernie Zhang (EEE Call Centre Director) to Kristoff Hughes (GJ) : EEE call centre and customer development EEE operational activity data in the years to 30 September 2009 Email from Len Wozniak (EEE Operations Director) to Kristoff Hughes: Insulation installation 10 Average insulation costs per job 11 Average insulation costs per job 12 Website extracts The arguments for and against the Kyoto accord Extracts from UK government information re energy efficiency incentives How the Feed in Tariff (FIT) scheme works 13 Housing Investor Chronicle: UK government “Feed in Tariff” proposal (April 2010) 14 Email from Jo Carey to Sukanta Woolf: EEE future plans and opportunities in the UK and abroad Analysis of Advance Information (AI) By studying and analysing this Advance Information an overall picture of EEE could be established (Additional commentary by the examiners is provided in italics and in brackets) Exhibit provides a brief background to Gunter Jensen LLP (GJ), a UK firm of Chartered Accountants and Registered Auditors in which the candidate works It also provides a brief introduction to EEE as a client company and the industry in which it operates Exhibit provides an introductory summary of the Kyoto accord and its implications for UK carbon emission control This background information identifies the broader context in which this case is set It details the fact that the work which EEE conducts – which is funded by the UK government through UK power companies – is a part of the UK government's attempt to meet its commitment to reduce UK carbon dioxide emissions under the Kyoto accord EEE is primarily involved in the household loft insulation programme © The Institute of Chartered Accountants in England and Wales 2010 Page of 28 CASE STUDY – NOVEMBER 2010 Exhibit gives information on EEE’s history and structure detailing the background of the founding members – who are its directors and equal shareholders – and explains the history and development of the company EEE acts as a bridge between the power companies that operate in the East of England and their customers who choose to have their property insulated under the UK government carbon emission control programme Because of personal and historical links, EEE operates predominantly on behalf of Anglo Eastern Power Supply (AEPS) – a subsidiary of Global Power Supply GPS) – and uses the AEPS database of customers for its marketing purposes Information is also provided concerning the estimate which EEE had made concerning its potential market of approximately 300,000 AEPS customers The agreement between AEPS and EEE means that EEE receives a fee of £200 per successful side contract, and subsequently receives a further average fee of £600 for installing the insulation This information provides candidates with the details of the strong financial relationship between EEE and AEPS It also contains useful information on the estimates of market size for EEE Exhibit provides more detailed information on EEE’s business operations Call centre operations are the responsibility of Bernie Zhang The call centre is based in the UK and uses UK residents to make the calls to customers using the AEPS database If the call is positive the customer’s details are passed to the EEE installation team and a copy of customer information is also sent to AEPS [This is a fairly simple operation and given the financial arrangements it is potentially very profitable] Installation work is the responsibility of Len Wozniak The installation work may be conducted by an EEE installation team or else by subcontractors When the work is completed satisfactorily EEE sends a customer’s Certificate of Satisfaction to AEPS together with their invoice for the full cost of the installation AEPS processes the invoice and pays EEE, in two instalments, within 60 days [This is clearly the most complex part of this operation and one which requires a large workforce and careful organisation] Sales of alternative energy products (AEPs) are also responsibility of Len Wozniak Sales of these items had been as a result of customer enquiry either by telephone or through the EEE website The two main items are solar panels, which sell for £6000 - £8000, and alternative energy stoves, which sell for an average of £400 EEE is not involved in installing either of these items Solar panels have historically represented about 50% of the alternative energy products Exhibit is a letter from Jo Carey (EEE’s MD) to Sukanta Woolf (GJ partner) providing a brief commentary on EEE’s financial statements which she has attached These statements are for the years ending 30 September 2006-2009 “from our first year of trading to our most recent full year’s results” It is therefore possible for candidates to review EEE’s full financial history as part of their preparation Jo Carey also puts the UK recession in perspective by stating “trading conditions were tough in 2009 and, although the cashflow in 2009 continued to be strong, the profit after tax was not as high as in 2008” The issue of the importance of cash control and profitability has had a direct impact on the shareholders “As a result, the dividend to shareholders was reduced by £100,000” Exhibit provides pages of management accounts and notes, for the years to 30 September 2009 These accounts (which are in line with the audited accounts) provide the following key information: EEE has achieved good revenue growth over the four years – up from £3,094k (2006); to £8,175k (2007) an increase of 164%; to £13,082k (2008) an increase of 60%; to £15,134k (2009) an increase of 16% (The decrease in the rate of growth may be caused by the effect of the recession in 2009, may indicate that EEE’s market is tightening, or both) EEE’s gross margins on total revenues have changed over time: 50% (2006); 40% (2007); 30% (2008); 26% (2009) (This changing GP% needs further analysis by examining the detailed margins relating to the various business activities) Overheads as a percentage of revenue have decreased steadily over time: 31.3% (2006); 20.1% (2007); 15.1% (2008); 15.1% (2009) (These changes show that EEE is controlling its overheads when compared against revenues – however there has been an absolute increase of £1,316k over the four years – from £968k(2006) to £2,284k (2009)) Operating profit percentage undulated in the four years being: 13.7% (2006); 16.5% (2007); 12.0% (2008); 8.9% (2009) (It would appear that the best year was the second year of operations – despite strong growth, costs were well controlled – followed by a steady decline as costs have risen) Dividends paid have varied over time but after the first year have been very strong: £50k (2006); £400k (2007); £600k (2008); £500k (2009) (The decline in 2009 has already been emphasized by Jo Carey and is an indication that the directors, who are receiving the dividends, must all be aware of the changes in EEE’s cash and profit situation) The balance sheet shows that EEE is a company with a fairly normal mixture of non-current and current assets and some current liabilities, but with no long-term debt at this time Since the opening year it has had a strongly increasing working capital and total net assets position (The main noteworthy points are (i) a steady increase in current assets since 2006 notably in accounts receivable – in line with revenues (ii)a good cash position (iii) inventories appear low/well controlled and (iv) current liabilities have not increased significantly over time All of these are signs of good financial management in EEE) © The Institute of Chartered Accountants in England and Wales 2010 Page of 28 CASE STUDY – NOVEMBER 2010 The cash flow statement shows how the annual cash generated has been spent and shows positive cash inflows for each year: £25k (2006); £310k (2007); £138k (2008); £318k (2009) resulting in a substantial final cash balance of £791k (Apart from the purchase of non-current assets, the main cash outflows from the cash generated from operations have been the dividends paid totalling £1,550k) From the Notes to the accounts concerning Revenue, and Cost of sales the detailed trends in revenue streams and the comparative margins can be analysed (Over the years 2006-2009 revenue from commission rose significantly for the first years but has fallen back in 2009 indicating that this income might have peaked Revenue from installation work has been rising in all four years but the rate of increase has declined in 2009 – further evidence that the market for insulation installation is tightening Revenue from AEPs – particularly solar panels – has grown exponentially from £112k (2006) to £1,995k (2009) The margins on commissions are: 76% (2006); 90% (2007); 90% (2008); 90% (2009) Margins on installations are 34% (2006); 11% (2007); 7% (2008); 6% (2009) It is also clear that these two revenue streams are dependent on each other and analysing these business activities together may be appropriate The margins on AEPs are 50% (2006); 50% (2007); 50% (2008); 54% (2009) – which means margins are holding/increasing in an expanding market – a very good sign) Revenue trends and the margins must be fully analysed to understand what is happening to EEE’s business and its life-cycle (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 picture of the business) Exhibit is an email from Bernie Zhang which explains in more detail how the call centre has operated since the business started; how the installation market has been calculated and what has been the EEE success rate and flow of customers signing contracts It also refers to This is important information giving a clear indication of the success rate (an average of in in the four years of business) in calling customers, some of the reasons for that success rate (rate of subsidy; use of local residents in the EEE call centre) and of the strong margins from this business activity Exhibit is an attachment to the previous exhibit which provides tabular numerical information concerning EEE’s operational activities of signed contracts and installations completed, together with other information which allows the EEE market for this work to be determined From this information the total potential market can be calculated as being 60,000 households which means that EEE has probably only one or two years work remaining on this project Candidates would have been well advised to have calculated this total figure and arrived at their own conclusions concerning the EEE business activity position [Despite its brevity this is a key exhibit] Exhibit is an email from Len Wozniak which provides important information on the development of the insulation installation operations It explains that because of the time taken to complete an installation job, including paperwork, EEE’s initial team of installers had to be augmented by using subcontractors to cope with the schedule of work This posed additional/unforeseen problems for EEE’s operations in terms of quality and nature of work done: subcontractors work to different operational standards; there was an increased need for more supervision of subcontractors’ work; there was an increase in the amount of remedial work necessary – which was carried out by supervisors – because of customer dissatisfaction with subcontractors’ work; there was an increase in materials used These factors meant that EEE ended up training its own installers and then promoting them to be supervisors looking after subcontractors Inevitably these key factors and their impact on efficiency and the quality of work delivered have changed EEE’s operations and have had an impact on profitability Exhibit 10 provides the financial data for job costs (i) using own labour (ii) using subcontractors, for the years 2006-2009 This shows the large difference in costs between using subcontractors versus using own labour The subcontractors’ costs per job are much higher (more than 40% each year) and the effect of this difference is to reduce profitability on the installation work – because it is virtually ‘fixed price’ work – bringing that profitability down to very marginal levels Using the average revenue figure of £600 and the 2009 information this was just £22 per installation using subcontractors, versus £207 for a job done using own labour Exhibits 11 a, b & c are a series of articles (i) from a website identifying some of the arguments for and against the Kyoto accord; (ii) from UK government information (March 2010) outlining the incentives to become energy efficient customers; (iii) an explanation of how the Feed in Tariff (FIT) works from the Energy Saving Trust UK All of these articles indicate that government incentives will be available from April 2010 to encourage and enable customers to make energy savings and earn long-term government subsidies (The government announcement is extremely timely, and the fact that the incentives focus on subsidies for the installation of solar panels means that it is particularly relevant for EEE – despite the fact that its current business activity is only focussed on the supply of solar panels) © The Institute of Chartered Accountants in England and Wales 2010 Page of 28 CASE STUDY – NOVEMBER 2010 Exhibit 12 consists of an article in the Housing Investor Chronicle giving a positive review of the UK government FIT proposal As well as identifying the potential return on the £10,000 - £12,500 investment that might apply (7-10% tax free), the article also identifies the fact that the UK energy regulator is predicting a 20% power price increase by the year 2020 – which should act as an additional incentive for households to install solar panels The article also identifies the fact that investors and banks will see the benefit of the scheme, and as a result specialist loans or top up mortgages will become available to those who want to install such a system (This article reinforces the good news concerning the government incentives but it is also identifying one or two of the potential difficulties with the scheme) Exhibit 13 is an email from Jo Carey concerning EEE future plans and opportunities in the UK and abroad Her strategic review considers the future for EEE in seizing the opportunity to develop its revenues from alternative energy products and in particular solar panels and possibly solar panel installation She identifies the need (and the problems) associated with being a qualified accredited installer She also identifies the effect of the recent increase in demand for solar panels which has pushed up the cost of purchasing them from normal UK suppliers and meant that EEE is now purchasing solar panels directly from Asian suppliers in order to maintain profit margins Jo Carey's review also considers the current UK business with AEPS and identifies the fact that the in success rate on UK insulation installation contracts is the maximum and that no further UK work is likely to emerge However she does identify that there may be some future work with another GPS company overseas which would enable EEE to transfer its expertise from the current project into a new location (This is an important email which identifies the possible strategic direction for EEE both positively in terms of new projects and new directions and negatively in terms some of the limits in its current installation operations) Exhibit 14 comprises a series of news reports concerning different topical items The first article describes the fact that, because of the government solar energy subsidy scheme, new types of business being created described as “solar power farms” – meaning the larger-scale production of energy from solar panels covering large areas of land These can be viewed as either positive or negative developments depending on their energy saving potential versus their other impacts on the environment (The article also identifies the expected surge in demand and installation as expected to be 500% – but gives no measurable starting point or other objective yardstick against which to measure this claim) The second article describes the problems relating to insulation installation concerning the quality of work – particularly of subcontractors – and the quality of materials used It focuses on the difficulties which householders have in seeking redress (This article serves to confirm the problem experienced by EEE of identifying good quality efficient subcontractors) The third article looks at the issue of “sunspot” activity and the detrimental effect that a major increase in this activity could have on electrical systems worldwide The final exhibit has three short articles dealing with: (i) the dangers of poor quality loft insulation work by subcontractors causing house fires; (ii) the issue of the theft of paintings from a loft by an insulation subcontractor (again!); (iii) the rising cost and questionable quality of solar panel installation (These articles emphasise the problems of using subcontractors in installation work and the increasingly variable quality of solar panels) © The Institute of Chartered Accountants in England and Wales 2010 Page of 28 CASE STUDY – NOVEMBER 2010 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 from Sukanta Woolf, partner in Gunter Jensen LLP in charge of EEE work, dated November 2010, to Adie Maynard subject: Report for EEE board Exhibit 16 – email from Jo Carey, managing director of EEE, dated November 2010, to Sukanta Woolf subject: EEE results to 30 September 2010 and future opportunities Exhibit 17 – EEE management accounts for the year ended 30 September 2010 (4 pages) Exhibit 18 – email from Dany Parker, finance director of EEE, dated November 2010, to Jo Carey subject: Review of GPS proposal for EEE and other future opportunities Exhibit 19 – email from Len Wozniak, business operations director of EEE, dated 30 October 2010, to Jo Carey subject: EEE’s solar panel business Exhibit 20 – recent news articles relating to solar panels and energy generation Examination requirements You were required by Sukanta Woolf to prepare a draft report to the Board of EEE dealing with following: A review of EEE’s management accounts for the year to 30 September 2010 so that the members of the board understand the company’s financial performance You should cover revenue, gross profit and operating profit, evaluating these figures against the actual results for the year to 30 September 2009 You should discuss the results for each of the business activities and also comment on the cash flow statement An analysis of Dany Parker’s proposal for the board to consider expanding into Victoria state in Australia, where there is an opportunity for EEE to repeat its UK success In your analysis, you should include a calculation of the project’s profitability for the total 5-year period and comments on the assumptions made by EEE You should prepare a sensitivity analysis evaluating the effect of a change in the estimated success rate on calls being converted to contracts You should also consider the opportunities for, and threats to, EEE of this proposed expansion into Australia, including movements in the Aus $:£ exchange rate An assessment of the economic benefits and risks relating to EEE’s proposed strategy to develop its business from solar panel sales and solar panel installation in the UK Your assessment should consider how EEE might deal with these risks, and]also address Jo Carey’s and Len Wozniak’s concerns over, and the ethical issues relating to, the development of EEE’s solar panel business On the instruction page you are told 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 four pages of financial information provided in Exhibit 17 Using the new financial information it would then be essential to assess the 2010 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 costs including a discussion of EEE’s business activities as well as a commentary on the cash flow statement Similarly evaluating the proposal for a possible expansion into Victoria state in Australia requires a careful detailed reading of the information given in Exhibit 18 and remembering that similar information had been provided in the Advance Information before tackling this © The Institute of Chartered Accountants in England and Wales 2010 Page of 28 CASE STUDY – NOVEMBER 2010 straightforward requirement to calculate and assess the possible total 5-year profit However considering sensitivity and the opportunities for, and threats to EEE of this project required a more developed response The third requirement requires an assessment of economic benefits and risks relating to EEE’s proposed strategy to develop its solar panel business, together with addressing the directors’ ethical concerns With good 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 her email Jo Carey (JC) requests an analysis of the income and cash flow statements (meaning both the 2010 Income Statement and 2010 Cash Flow Statement) Separately she requests a review of the Global Power Supply (GPS) proposal for a project in Victoria, Australia stating “we would like an overall calculation of the project’s profitability for the total 5-year period, together with your consideration of our assumptions for this project” She outlines some of the details of the project stating that it is an “interesting opportunity” and identifies similarities with the market in East Anglia and provides a reminder that two of the EEE board have past experience in Australia She raises the additional question of whether EEE should “expand significantly its solar panel business” and refers to Len Wozniak’s concerns as well as mentioning some of her own JC identifies the risks that EEE might be tarnished by the general concerns surrounding solar panel supply and power generation and requests that GJ provide their professional views on how EEE might address this “public scepticism” (Exhibit 19) (This is an exhibit which affects all requirements, but the main requests are fully interpreted by Sukanta Woolf (in Exhibit 15) enabling candidates to work through the information provided in answering the case Although none of the requests require complex calculations the requests for “analysis”, “reviews”, and “professional views” are intended to elicit appropriately developed written analytical responses) Exhibit 17 This exhibit comprises four pages showing the management accounts for the year to 30 September 2010: 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 main business activities; similar details covering cost of sales; a schedule of overheads/administrative expenses; and details of the non-current assets for tangible assets The 2010 set of accounts are presented in a similar format to the 2009 information presented in the AI (Exhibit 6) and should have posed no problem for any candidate to assimilate (This would 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 2010 should have been anticipated and detailed analysis on AI figures was essential preparatory work) Exhibit 18 This email from Dany Parker to Jo Carey provides the detailed numerical estimates and assumptions relating to EEE’s project in Victoria The numerical information is presented in a similar format to the information shown in the AI (Exhibit 8) and should have meant that candidates would recognise both the 5-year contract and work profile and the types of parameters affecting the market predictions The information relating to revenues and costs for this project was also similar and for some of the numbers identical – apart from the currency – to the information in the AI (This exhibit which related specifically to Requirement should have been very easy to comprehend and assimilate, although it was not necessarily predictable Provided that candidates had done their preparatory work and made a point of understanding each exhibit in the AI then working through this particular exhibit would have been straightforward However care was necessary because the information was presented in two currencies and also because this exhibit contained the same numbers as had been presented in the AI – as a result there was a risk that candidates would erroneously accept those numbers without questioning them The fact that Requirement requested a sensitivity analysis should have alerted candidates to question the numbers and the assumptions underpinning the numerical information and that there was a need for professional scepticism concerning the information supplied and care would be needed in any commentary) Exhibit 19 The email from Len Wozniak identifies a number of critical matters affecting the speed of the development of the solar panel business The list provided identifies four main political and economic concerns which surround the FIT policy The final two paragraphs raise the issue of the sourcing of solar panels from abroad and the potential business development which could result from a link-up with a “solar power generating company” (SPGC) (This email builds on parallel AI information and news articles concerning the quality of work of insulation subcontractors which had provided some background context to an industry which has some unscrupulous operators with doubtful practices The list provided is a summary of the general questions being raised in many newspapers concerning the future of the UK government’s FIT policy, and should have acted as a reminder to candidates of other similar issues which have appeared in the news and which they might have considered in their general PEST/ PESTLE or SWOT analysis In addition to the obvious points being raised by this exhibit there is a subtle ethical conflict in the last sentence of this email which suggests that a link with an SPGC operation might be successful and profitable © The Institute of Chartered Accountants in England and Wales 2010 Page of 28 CASE STUDY – NOVEMBER 2010 particularly if targeted at “lower income households” – which should have raised concerns about exploiting the vulnerability of such potential customers ) Exhibit 20 This exhibit comprises two newspaper articles concerning different aspect of solar panels and energy generation The first article is in a “trade” journal and describes the increasing public concern over the accuracy of the energy and cost savings claims made by installing solar panels together with other concerns over the energy conversion capability and long-term quality of imported solar panels This article also refers to other negative publicity concerning the qualifications of solar panel installers and the quality of their work The second article is from a national newspaper reporting on the topical “rent-a-roof” scheme which in itself provides some fairly generous (and presumably hard to verify) figures concerning the benefits and costs of having panels installed in this way However the article does mention a number of the risks regarding this scheme over the longer term (This exhibit identifies different problems and concerns which already exist within and around the solar panel industry in general and – given its infancy – it would be hard not to conclude that the industry will continue to generate its problems No mention is made of EEE in these articles so the problems, although quite precisely defined, are not fully aimed at EEE – but there are clearly ethical points to be considered and addressed by any business in this industry) The information provided in the Exam Paper (EP) develops a number of previously established factors for EEE’s business all of which require different analytical techniques to be used in order to provide business advice to the board The financial information provided to 30 September 2010 requires a clear focus on financial statement analysis – a basic professional skill and one which candidates must demonstrate The analysis of the estimates for the project in Australia requires structured financial data and information analysis together with a broader, professionally sceptical, review of both the information supplied and this particular business activity in the form of both sensitivity and partial SWOT analysis The other information provides the basis for consideration of the issues affecting a future solar panel strategy whilst also focusing attention on the broader public concerns affecting this particular business activity The specific strategic analysis requested requires a partial PEST or PESTLE and SWOT analysis of this business activity together with a sceptical and ethical review of these issues The individual requirements clearly describe the route which should be followed in developing the report For Requirement the financial statement analysis of EEE’s management accounts for the year to 30 September 2010 had to be focused on specific key features For the 12 months income statement the analysis should be of revenues, gross profit both in total and for each business activity, as well as operating profit evaluating these figures against the 2009 results Candidates were also requested to comment on the cash flow statement The first part of this financial statement analysis – that is concentrating on the income statement and business activities – should have been a speedy exercise numerically, which then had to be developed with a clear commentary based on the numerical analysis It should then have been augmented by a comment on the cash flow statement Requirement requires some basic financial data analysis to calculate the profitability for the total 5-year project, together with a comment on the assumptions made by EEE Given that the information provided is a series of estimates, this would require a detailed review of all financial assumptions with some appropriate professional scepticism directed at each assumption made Specifically candidates have to perform a sensitivity analysis of the success rate on calls and consider the impact of movements in Aus $:£ exchange rate as well as consider the opportunities and threats from this “expansion” This calculation, evaluation, flexing and consideration of some of the wider issues should have been a reasonably logical and straightforward process The evaluation of this “expansion” would also follow on quite naturally from a correct analysis of the 2010 financial results Requirement requires a strategic analysis of EEE’s solar panel business and the prospect of expanding that business activity in terms of solar panel sales and solar panel installation in the UK The requirement builds on the scenario presented in the AI and is accentuated by the analysis in Requirement There is also the need to address the specific concerns raised by Jo Carey in her email (Exhibit 16) and by Len Wozniak in his email (Exhibit 19) as well as a need to review and comment on the solar panel issues identified in (Exhibit 20) In addition there are the other current economic issues which might have been identified independently by candidates which would have augmented the qualitative review and commentary required An important element of this requirement is to maintain a balanced approach in terms of economic benefits and risks and any ethical issues identified These three EP exhibits provide different examples of business concerns some of which are beyond the control of the company and some of which can be addressed and managed by EEE Candidates had to identify all issues, integrate AI and EP and evaluate EEE’s strategy © The Institute of Chartered Accountants in England and Wales 2010 Page 10 of 28 CASE STUDY – NOVEMBER 2010 EEE Answer Appendix (Requirement 2) Victoria project Using success rate of in gives 100,000 as number of contracts Income 100,000 @ $800 Costs Call centre costs Installation Local fixed (200 + 600) 9.545% x 100,000 x $200 $578 x 100,000 $400 x Local profit in Australian dollars Attributable fixed costs £1,300,000 x converted to Au $ Australian project profit in Australian dollars? Project profit in UK £s sterling but the contribution could be as high as Notes Au $000s 80,000 1,909 57,800 2,000 61,709 18,291 13,000 5,291 £ 2,646,000 £ 9,145,500 Flexing using in success rate (as in UK) on calls leading to contracts Au $000s Income 60,000 @ $800 (200 + 600) 48,000 Costs Call centre costs Installation Local fixed 9.545% x 60,000 x $200 $578 x 60,000 $400 x Local profit in Australian dollars Attributable overheads converted into Au $ (for years) Australian project loss in Aus dollars Project loss in UK £s sterling but the contribution could be as high as © The Institute of Chartered Accountants in England and Wales 2010 1,145 34,680 2,000 37,825 10,175 13,000 -2,825 10 £ -1,412,500 £ 5,082,500 Page 24 of 28 CASE STUDY – NOVEMBER 2010 Commentary on Australian project proposal This assumes a hit rate of in on the VPS - may be high - this sb critically evaluated Call centre cost estimate is based on the 2009 UK experience - new factors may affect this Installation variable cost is the precise 2009 UK figure but shown in Aus $ - this may be approximately right OR precisely wrong - local Aus factors/ work practice may affect this Are these fixed costs which have been carefully assessed or are they just a "best guess" - are they likely to be a conservative or a high estimate - if the project does not exist will they disappear What are these "attributable"UK fixed costs - will they exist without this project - if so ignore This is the profit over years - average £530,000 per year - some years will be much lower Using gross profit or "contribution" this makes project highly feasible - average £1,830,000 pa This is based on UK experience and it may still be high - UK voices may not work The local (gross) profit (or contribution) over years is still significant 10 If "attributable" UK fixed costs are deducted the project appears to make a loss Overall Need to question the accuracy of any year forecast and suggested income pattern Need to review year estimates of costs: variable; pattern; fixed; inflation Exchange rate changes need to be considered (see next worksheet) Would a change in Aus government cause a change in insulation policy Would the internet really mean a possible higher hit rate © The Institute of Chartered Accountants in England and Wales 2010 Page 25 of 28 CASE STUDY – NOVEMBER 2010 EEE Answer Appendix (Requirement 2) Annual analysis Australia 2011 Customer statistics Signed contracts Installations completed Annual profit Commissions Installations Call centre costs Installation Local fixed 9.545% Aus$578 AUS$400 Local profit Attributable "fixed" © The Institute of Chartered Accountants in England and Wales 2010 2012 2013 2014 2015 Total 12,000 10,000 24,000 20,000 28,000 24,000 22,000 30,000 14,000 16,000 100,000 100,000 Aus$000 Aus$000 Aus$000 Aus$000 Aus$000 Aus$000 2,400 6,000 8,400 4,800 12,000 16,800 5,600 14,400 20,000 4,400 18,000 22,400 2,800 9,600 12,400 20,000 60,000 80,000 229 5,780 400 6,409 458 11,560 400 12,418 535 13,872 400 14,807 420 17,340 400 18,160 267 9,248 400 9,915 1,909 57,800 2,000 61,709 2,485 2,600 (115) 18,291 13,000 5,291 1,991 2,600 (609) 4,382 2,600 1,782 5,193 2,600 2,593 4,240 2,600 1,640 Page 26 of 28 CASE STUDY – NOVEMBER 2010 EEE Answer Appendix (Requirement 2) Aus$ sensitivity Installations 100,000 Aus$000 Revenue Commission @ A$200 Installation @$600 20,000 60,000 80,000 Costs Call centre @ 9.5% Installation @ A$578 Local fixed @ A$400 pa 1,909 57,800 2,000 61,709 Local profit 18,291 In £ @ A$2 UK overheads @ £1.3m pa Project profit A$ rate to have no profit 9,146 6,500 2,646 = 18,291/6500 = 2.81 Commentary Compare with past movements in Aus$ rate to assess risk? If Aus $ strengthens from Aus$2 = £1(to say A$1 =£1) then project is more profitable If Aus $ weakens from Aus$2 = £1(to say A$3 =£1) then project is unprofitable This depends on the nature of the "attributable" UK fixed costs © The Institute of Chartered Accountants in England and Wales 2010 Page 27 of 28 CASE STUDY – NOVEMBER 2010 Breakeven caculation (using EEE estimates) Revenue Aus$ 800 Call centre costs Installation 19 578 Contribution per contract 203 Local fixed costs Contracts pa required to cover local fixed costs Total allocated fixed costs (local & UK) Contracts pa required to all attibuted fixed costs Total contracts over years required to cover all costs 400,000 1,970 3,000,000 14,778 73,892 Required call success rate approx 1:4 © The Institute of Chartered Accountants in England and Wales 2010 Page 28 of 28 NOV 2010 - EASTERN ENERGY EXPERTS LTD Published Key DATE CANDIDATE NO TIME MARKER NUMBER ES Req Req Req Overall TOTAL 11 12 11 42 CC SC IC ID NA Total SUPERVISOR SIGNATURE CHECKER SIGNATURE Framework ID = Insufficiently Demonstrated IC = Insufficiently Competent SC = Sufficiently Competent CC = Clearly Competent 1 or or --- Range 1 2 3 4 Executive summary ASSIMILATING & USING INFORMATION Overview of Executive Summary STRUCTURING PROBLEMS & SOLUTIONS Use of appropriate numbers Suitable document for the board - appropriate brief introductory paragraph - sufficient but not excessive text Total revenue / gross profit / GP% Business activity revenues - Review of EEE 2010 results - revenue and GP 2010 v 2009 - business activities - cashflow Business activity gross profits Cashflow - Discussion of Australian proposal - year profit - sensitivity Proposal profit / sensitivity Consider solar panel business strategy - benefits and risks - ethical issues NA (CC) (SC) (IC) (ID) NA ID (CC) (SC) (IC) (ID) Min over Min over Min over Anything else IC SC ID IC SC CC Min Min Min Anything else CC Summarises key findings (quality of discussion) Commentary on financial performance - total figures (revenue and GP) - business activities (revenue and GP) - cashflow Commentary on Australian proposal - profit - sensitivity - opportunities / threats Commentary on solar panel business - benefits - risks - ethical issues NA ID (CC) Min (SC) Min (IC) Min (ID) Anything else IC SC CC APPLYING JUDGEMENT CONCLUSIONS AND RECOMMENDATIONS Evaluates key points Draws conclusions Insulation market saturated Increase in solar panels has improved GP% On financial analysis of 2010 figures - significant reduction in overall activity - need to replace declining UK insulation Australian project exploits existing expertise On Australian proposal - concludes based on profit - qualifies decision based on other factors Significant uncertainties / threats On solar panel strategy / ethical issues - growing lucrative market - currently no direct threat from ethical issues Economic benefits outweigh risks Potential reputational damage from ethical issues (F) NA ID IC SC CC Makes key recommendations Consider other markets for insulation Need more information about Australian project assumptions (R) NA ID IC SC CC Address Australian staffing issues Consider relevant solar panel business partnerships Address solar panel quality control problems Need safeguards against mis-selling (R) NA ID IC SC CC Explain why the grades profile reflects how well the candidate has produced an executive summary CC SC IC ID NA Total REQUIREMENT - Review of EEE's 2010 financial performance ASSIMILATING & USING INFORMATION STRUCTURING PROBLEMS & SOLUTIONS Uses relevant AI & EP information Financial analysis on revenue 2010 actuals (Exh 17) - revenue £9,949k - GP £3,347k - OP £888k Total revenue - down £5,185k (34%) - history of growth Revenue stream numbers - commissions down £1,150k (46%) - installations down £5,376k (51%) - AEP up £1,341k (67%) / solar panels up £1,425k (131%) 2009 actuals (Exh 6) - revenue £15,134k - GP £4,005k - OP £1,351k Comment on revenue streams - commissions / installations - total AEP / solar panels Business activity figures (Exh 6, 17) - revenue streams - COS Sales mix percentages - commissions (14% v 17%) - installations (53% v 70%) - AEP (33% v 13%) / solar panels (25% v 7%) Cashflow - net cash inflow £867k (Exh 17) - 2010 individual flows - 2009 figures (Exh 6) (R) NA Need dash to get ID IC SC CC Financial analysis on gross profit (R) NA Need dashes to get ID IC SC CC Total GP down £658k (16.4%) / GP% increased (33.6% v 26.5%) Commissions / installations GP down ( £1,136k / £279k) AEP / solar panels GP up (£757k / £804k) Calculation of GP% on commissions / installations Calculation of GP% on AEP / solar panels Identifies business issues Impact of recession on AEP - availability of loan finance - discretionary spend (R) NA ID IC SC CC Financial analysis on operating profit Product lifecycles - insulation: mature / declining - solar panels: expanding Environmental issues - government grants underpin business - green issues important to consumers Total OP down £463k (34.3%) OP margin unchanged (8.9%) Total overheads down (£157k) Overheads as a % of revenue up (21.4% v 15.1%) Calculation of change in staff costs / training / run-off insurance (R) NA ID IC SC CC Financial analysis on cashflow (commentary) Own research - new landlord obligations - new developments in energy sector - (F) NA ID IC SC CC Operations - significant cash inflow (£1,220k / £1,490k) Working capital - positive (inflow £270k v outflow £135k) NCA - reduced investment (£54k v £352k) Dividends - reduced (£200k v £500k) (R) NA ID IC SC CC APPLYING JUDGEMENT CONCLUSIONS AND RECOMMENDATIONS Implications of financial analysis on revenue Loft insulation market saturated Numerical evaluation of market saturation Increasing importance of solar panels to EEE Solar panels currently insufficient to sustain business Stoves not an important part of EEE (R) NA ID IC SC CC Draws conclusions and makes recommendations Overall conclusion on revenue - significant reduction in overall activity - insulation may soon not be viable - solar panels is a growing market Overall conclusion on GP / OP - overall GP has declined - change in sales mix has improved GP% - OP decline is worse than GP decline - different overhead base due to changing sales mix Implications of financial analysis on GP / OP Low / falling GP from insulation business Significant GP from AEP / solar panels Commission GP% falling due to fixed call centre costs Installations GP% increasing due to less sub-contracting Solar panels GP% stable despite cost pressures Comment on staff costs / training Comment on run-off insurance (R) NA ID IC SC Overall conclusion on cashflow - good cash inflow given decline in activity - strong cash position going forward - cash available for new ventures Recommendations - replacement needed for insulation activity - consider new UK markets for insulation (eg landlords) - consider any other related energy saving activities - overheads need more analysis for possible reductions CC Implications of financial analysis on cashflow Cash generating business Lower activity reduces need for working capital Apparent non-replacement of NCA Directors prudent in taking reduced dividend (R) NA ID IC SC (R) NA (F) NA Range of relevant areas ID IC SC CC SC CC Depth of discussion ID IC CC Explain why the grades profile reflects how well the candidate has reviewed EEE's 2010 financial performance CC SC IC ID NA Total 11 REQUIREMENT - Proposal to expand into Australia ASSIMILATING AND USING INFORMATION STRUCTURING PROBLEMS & SOLUTIONS Uses relevant AI & EP information Calculation of profitability Market size (Exh 18) - market size is 100,000 households - Aus$200 + Aus$600 commission rates Costs (Exh 6, 18) - call centres (9.5% of commission revenue) - installation costs (Aus$578) - local fixed costs (Aus$400k) - attributable UK fixed costs (£1.3m) Revenue (Aus$80m / Aus$60m) COS (Aus$59.7m / Aus$44.7m) Local fixed costs (Aus$2m) Attributable UK fixed costs (Aus$13m / £6.5m) Sterling profit (£2.65m / £0.1m) (R) NA ID IC SC CC Sensitivity calculation Sensitivity calculation on success rate - re-calculates profit using in or justified other rate; OR - re-calculates success rate at breakeven (F) NA Comment on success rate sensitivity - uses in as this is UK rate - compares original and revised profit / success rate ID IC SC CC Sensitivity calculation on forex rate - Aus$ / % movement to breakeven; OR - uses alternative Aus$ to get revised profit Comment on forex sensitivity - compares original and revised profit / Aus$ rate Identifies business issues Saturation of UK market Life cycle of business (5 years max) Australian market conditions currently unknown Own research - Aus$ rates - recent Australian government policy - (R) NA ID IC SC (R) NA (F) NA Range of relevant areas ID IC SC CC IC SC CC Depth of analysis ID Uses professional scepticism to comment on assumptions Revenue - in rate may be high - considers timing of revenue / profit - local housing profile will impact success rate CC Call centre and installation costs - call centre (9.5%) is based on UK experience - relevant? - call centre costs may be low (overtime / cost of international calls) - installation costs looks to be based on UK experience - realistic? Local fixed costs - round sum - estimate? - may be additional costs eg setup Attributable UK fixed costs - very large round sum - no justification - may not relate to the project / may not impact decision (R) NA (F) NA Range of relevant areas ID IC SC CC IC SC CC Depth of discussion ID APPLYING JUDGEMENT Opportunities for EEE of proposal (EXTERNAL) Potential to exploit existing expertise Potential to sell other EEE products eg solar panels CONCLUSIONS AND RECOMMENDATIONS Draws conclusions Concludes on profit calculations - gives total year project profit - consider if years is an appropriate timescale (4 years?) Potential to extend to rest of Australia Link with GPS permits easy entry to markets (R) NA Concludes on sensitivity - success rate is critical - Aus$ sensitivity less critical Impact on UK business - significant contribution to UK overheads - replaces declining UK insulation business ID IC SC CC Threats to EEE of proposal (EXTERNAL) Concludes on proposal - concludes on whether to accept project based on profit - qualifies decision based on other factors Possible quality control issues with subcontractors Large state will impact on transport costs Use of internet may encourage competition Change in Australian grant policy may affect take up (R) NA (F) NA Range of relevant areas ID IC SC CC SC CC Depth of discussion ID IC May be issues with recruitment / supervisors Makes practical commercial recommendations UK cost model may not be appropriate for Australia Need more information on revenue assumptions UK company may be less accepted Need more information on local costs assumptions Find out more about attributable UK fixed costs Negotiate better rates with VPS Look into local call centre / recruit Australians UK senior management needed in Australia Consider new UK markets for insulation (eg landlords) (R) NA ID IC SC CC (R) NA ID IC SC CC Explain why the grades profile reflects how well the candidate has analysed the Australian proposa CC SC IC ID NA Total 12 REQUIREMENT - Strategy for increasing revenue from solar panels ASSIMILATING & USING INFORMATION STRUCTURING PROBLEMS & SOLUTIONS Uses AI & EP effectively Economic benefits of increasing UK solar panel business Kyoto accord / UK carbon emissions (Exh 2, 11a) Government FIT policy increasing demand (up 500% in 2010) Government FIT incentive £835pa (Exh 11, 19) Solar panel sales currently very profitable Unscrupulous contractors (Exh 14d) UK core business saturated / in decline / needs replacing Poor quality solar panels (Exh 14, 20) Installing solar panels would be a new revenue stream Over optimistic claims (Exh 16) New markets (solar farms / "rent-a-roof" / commercial property) Potential return for getting in early on new technology (R) NA (R) NA ID IC SC ID IC SC CC CC Economic risks of increasing UK solar panel business Describes wider context Government committed to Kyoto Solar panels one way to achieve this Increasing consumer green awareness Rising energy prices makes solar more attractive Link to financial performance review (R1) Own research - Cost of £10-12k limits private sales to wealthier households Loans to purchase solar panels currently difficult to obtain Substantial investment needed in sales advisers / installers Expected 25 year life of panels may cause warranty problems Dependent on government subsidies continuing Time-consuming and costly to sign up customers (R) NA (R) NA ID IC SC CC Analysis of directors' concerns ID IC SC CC Increasing public scepticism - overseas sourcing / quality of product - over-optimistic claims of savings - quality of installation work - consumers awaiting further technological development FIT sustainability - impact of government policy changes - change in FIT rates (F) NA ID IC SC CC APPLYING JUDGEMENT CONCLUSIONS AND RECOMMENDATIONS Evaluates economic benefits and risks Draws conclusions and makes recommendations Internal benefits - meets long-term strategy requirement - builds on existing presence in the industry Internal risks - significant cost of solar panel guarantees - other general risks of starting new business activity External benefits - government backing adds confidence - responding to consumer "green" awareness External risks - demand may outstrip supply (panels / installers) - lucrative market will encourage competitors (R) NA (F) NA ID IC SC CC SC CC Depth of discussion ID IC Poor quality of imported panels - panels may not last 25 years as claimed - unethical to mislead customers - EEE has received no complaints to date Optimistic claims on solar panel energy performance - consumers confused over expected output / efficiency - concerns being made public / negative image - EEE has received no complaints to date Concludes on solar panel sales and installation - growing lucrative market - economic benefits outweigh risks Concludes on ethical issues relating to solar panels - potential reputational damage - needs to be reviewed / managed Recommendations on solar panel business - invest in skilled personnel (sales, supervisors, installers) - consider relevant business partnerships (eg AEPS) Recommendations on ethical / directors' concerns - investigate quality control problems with panels - consider alternative suppliers - conduct supplier audits - record / monitor sales calls - ensure advertising clear and accurate - Range of relevant areas Uses professional experience to assess ethical issues (R) NA (F) NA Range of relevant areas ID IC SC CC SC CC Depth of discussion ID IC 'Solar Power Generating Companies' - aggressive selling / mis-representation is unethical - possible reputational damage by association Other ethical issues - carbon footprint of imports - use of poor quality / unaccredited installers (R) NA (F) NA Range of relevant areas ID IC SC CC SC CC Depth of discussion ID IC Explain why the grades profile reflects how well the candidate has analysed the strategy of increasing revenue from solar panels CC SC IC ID NA Total 11 Overall paper APPLYING JUDGEMENT CONCLUSIONS AND RECOMMENDATIONS Meeting the requirements Structure and style Suitable style Requirement - logical flow / not repetitive - revenue, GP and OP - clear structure within sections - business activity analysis - sufficient but not excessive headings - cashflow Suitable language for audience Requirement - formal language / appropriate jargon - year profit - recognises external report - success rate sensitivity - legibility / spelling - discusses opportunitiesand threats Appropriate appendices ` Requirement - calculations clear and easy to follow - economic benefits and risks - assumptions clearly set out / no excessive text - directors' concerns - calculations used / referred to in report - appropriate response to ethical issues NA (CC) (SC) (IC) (ID) ID IC Min over Min over Min Anything else SC CC NA (CC) (SC) (IC) (ID) ID IC Min over Min over Min Anything else CC SC IC ID NA Total SC CC ... Accountants in England and Wales 2010 Page of 28 CASE STUDY – NOVEMBER 2010 PART 2: THE CASE STUDY EXAMINATION Scenario for the paper (Advance Information) The case study relates to Eastern Energy.. .CASE STUDY – NOVEMBER 2010 PART 1: EXECUTIVE SUMMARY Introduction This report covers the November 2010 Case Study exam It is issued in conjunction with... of financial statement analysis in the case study © The Institute of Chartered Accountants in England and Wales 2010 Page 16 of 28 CASE STUDY – NOVEMBER 2010 Requirement 2: Proposal to expand