Case study july 2011 exam paper ICAEW

List of exhibits The following exhibits were included in the material provided as Advance Information: 1 About you Ossie Fordham, your employer Rosslyn Chartered Accountants and your c

Wednesday 27 July 2011

(4 hours)

CASE STUDY

CANDIDATE NUMBER

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of your answer

3 After the instruction to stop writing at the end of the paper, you will be given five

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exhibits from the case material, included in your answer WILL NOT be marked by

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List of exhibits

The following exhibits were included in the material provided as Advance

Information:

1 About you (Ossie Fordham), your employer (Rosslyn Chartered Accountants) and your client (Watchwell Limited)

2 The UK security industry: Background

3 Manned guarding: The business model (Industry briefing document)

4 All about Watchwell Limited (WW)

5 Watchwell Limited board briefing: Business review

6 Watchwell Limited: Management accounts for the year ended 30 June 2010

7 Watchwell Limited: Business plan

8 Briefing note: Employment issues in manned security

(Rosslyn Chartered Accountants – HR Advisory Department)

9 Regulation: The Security Industry Authority (SIA)

10 Watchwell Limited: Tenders

11 Watchwell Limited: Example acquisition appraisal – Tyro Guards

12 Press articles

The following items are newly provided:

13 Email dated 27 July 2011 from Alfred Vesey to you: Watchwell Limited (WW)

14 Watchwell Limited: Management accounts for the year ended 30 June 2011

15 Email dated 25 July 2011 from Tom Mitchell to Alfred Vesey: Acquisition target – Mustang

16 Letter dated 21 July 2011 from Corey Thwaites (PQR) to Tom Mitchell (WW):

Tender to become sole security provider to combined Funtimes / PQR business

17 Funtimes – where has it come from? (‘Music For Today’ magazine, July 2011)

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WATCHWELL LIMITED: CASE STUDY REQUIREMENT

You are Ossie Fordham, a final-year trainee Chartered Accountant working for Rosslyn Chartered Accountants, a firm based in Weymouth, a town on the south coast of

England You work closely with, and report to, the senior partner, Alfred Vesey

One of the firm’s clients is Watchwell Limited (WW), a medium-sized manned security company for which Rosslyn Chartered Accountants have provided business advisory

and corporate finance (but not audit) services since its incorporation in 1995

Requirement

You are required to prepare a draft report for the WW board, as set out in the email

dated 27 July 2011 from Alfred Vesey to you (Exhibit 13) Your report should comprise

the following four elements:

• An executive summary

• Your responses to the three detailed requirements set out in Exhibit 13, including

financial appendices (as required)

State clearly any assumptions that you make All workings should be attached to your answer Your report should be balanced across the three detailed requirements, and the following time allocation is suggested:

Performing calculations and financial analysis 1 hour

Marks allocation

All of the marks in the Case Study are awarded for the demonstration of professional skills, allocated broadly as follows:

Applied to the four elements of your report (as described above)

• Drawing conclusions and making recommendations 20%

95%

Applied to your report as a whole

• Demonstrating integrative and multidisciplinary skills 5%

100%

Approximately 15% of the marks are awarded for the executive summary and 10% for the appropriate discussion of ethical issues within your answer to the requirements

In planning your report, you should be aware that not attempting one of the requirements will have a significantly detrimental effect on your chances of success, as will not

submitting an executive summary In addition, as indicated above, all four skills areas will

be assessed under each of the four elements of your report Accordingly, not

demonstrating your judgement and failing to include appropriate conclusions and/or

recommendations in each element of your report will affect your chances of success

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EXHIBIT 13

EMAIL

From: Alfred Vesey

To: Ossie Fordham

Date: 27 July 2011

Subject: Watchwell Limited (WW)

We have been asked by the WW board to carry out a review of the company’s latest management accounts and to provide it with advice on some important business

decisions that it needs to take I am attaching the following relevant documents:

• Management accounts for the year ended 30 June 2011 (Exhibit 14)

• An email from Tom Mitchell about an acquisition target, Mustang (Exhibit 15)

• A request from Corey Thwaites of PQR Leisure Parks to tender for the combined

Funtimes / PQR contract following the merger of those two companies (Exhibit 16)

• A recent press article about Funtimes (Exhibit 17)

I would like you to prepare a draft report to the WW board, in which you should:

1 Review WW's performance for the year to 30 June 2011

Your review should comprise a commentary on the revenue, gross profit, profit from operations and the six Manned Guarding KPIs, by comparison with the previous

year

2 Assess the proposal for the acquisition by WW of Mustang

You should calculate the price that WW should offer for Mustang You should

explain any assumptions that you make in that calculation You should also advise

WW on the factors to consider in appraising Mustang’s client contracts and profile of business activities, with reference to Tom Mitchell’s email dated 25 July 2011

3 Evaluate the advantages and disadvantages for WW in tendering for PQR’s

enlarged manned guarding contract with effect from 1 September 2011 after its

merger with Funtimes

You should address the commercial and strategic benefits and risks for WW’s

business in tendering for this larger contract, dealing with Corey Thwaites’ “matters for consideration” as well as any ethical issues arising

I look forward to reading your draft report

EXHIBIT 14

Watchwell Limited: Management accounts for the year ended 30 June 2011

INCOME STATEMENT

STATEMENT OF FINANCIAL POSITION

ASSETS

Non-current assets

445

Current assets

5,395

EQUITY & LIABILITIES

Equity

CASH FLOW STATEMENT

CASH FLOWS FROM OPERATING ACTIVITIES

£000

Profit on sale of property, plant and equipment (1)

Increase in other current liabilities 555

CASH FLOWS FROM INVESTING ACTIVITIES

Payments to acquire property, plant and equipment (105)

Receipts from sales of property, plant and equipment 6

CASH FLOWS FROM FINANCING ACTIVITIES

Cash and cash equivalents at beginning of year 2,086

NOTES TO THE MANAGEMENT ACCOUNTS

Revenue Hours

£000 000

Manned Guarding – total 17,998 1,511

18,924

‘Other’ includes £1,077,000 revenue and 94,000 hours from Quinto clients (see also note 5) Gross profit arose as follows: Manned Guarding: £3,423,000; Mobile Security: £547,000

2 Cost of sales

£000

Tendering and business development costs 149

14,954

£000

Running costs:

Salaries – head office staff (including directors) 1,082

Legal and professional charges 155 Telephones, printing, postage and stationery 121

Other items:

Profit on sale of property, plant and equipment (1)

2,024

The average number of employees during the year was as follows:

Head office staff (including directors) 33

855

Of the security guards, 13 work in Mobile Security The wages of these guards were

£192,000 In Manned Guarding, staff turnover was 24% and utilisation was 90%, while training days and sickness days per employee were 6.9 and 8.2 respectively

On 1 July 2010, the company acquired Quinto, a manned guarding company, for £223,000

Additions and disposals relate primarily to the upgrade of the time recording system

Trade receivables (net of impairment) 2,836 Other receivables and prepayments 84

2,920

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EXHIBIT 15

EMAIL

From: Tom Mitchell

To: Alfred Vesey

Date: 25 July 2011

Subject: Acquisition target – Mustang

We were approached recently by one of the industry’s corporate agents about the possibility of acquiring a company called Mustang Any acquisition would take effect from 1 October 2011

The purpose of this email is to ask Rosslyn Chartered Accountants to advise on what price we should offer for Mustang and the factors that we should consider in appraising its client contracts and profile of business activities

Overview of the business

Mustang was formed in 2008 by Sarah Glover (former manager at a mobile security company), Peter Ross (a former police officer) and Edwin Matthews (a former prison governor) These three remain the sole directors of Mustang, with Edwin as Finance Director

The company has three divisions: Manned Guarding, Mobile Security and Security Consultancy

It has experienced strong growth since its formation, most recently with the development of the Security Consultancy division, for which Peter has been primarily responsible The summarised results for the year to 30 June 2011 were as follows:

Manned Guarding

Mobile Security

Security Consultancy

TOTAL

In line with our normal practice, the directors would not transfer to WW at acquisition We understand that Peter is planning to set up a new security consultancy company in the North of England (where he was born) once he has left Mustang

Manned Guarding

I initially asked Edwin to complete our proforma spreadsheet, to support the above figures for revenue and gross margin I have reproduced this below

hours

Guards per shift

Charge rate

£

Pay rate

£

Annual charge

£

Annual pay

£

Other costs

£

Gross margin

£

Although there are only a small number of client contracts, all located in Dorset, you will see that these are all individually significant We established the following specific further facts about each one:

• Contract 1 (office building): This runs until 30 September 2012. The charge rate will rise to

£9.50 on 1 October 2011, when also the number of guards will rise from 2 to 3

• Contract 2 (shopping centre): This will be renewed, on the same terms as the existing

contract, for another 3 years when it expires on 30 June 2013

• Contract 3 (construction site): With this contract due to expire on 30 September 2011, a re-tender is currently in progress Mustang appears to have a 50% chance of winning this, though it is likely to be at a reduced charge rate

For the year to 30 June 2011, the Manned Guarding division reported the following further data:

• Utilisation: 93%

• Staff turnover: 17%

All guards (around 50% of whom are female) carry full SIA accreditation They receive six days

of annual training, across a wide range of areas such as ‘Client Skills’, ‘Dealing with Violence’,

‘Technology’, ‘Looking Smart’ and ‘Health and Safety’ Several guards work a 56-hour week

Mobile Security

All clients are located in the Poole area and contracts typically run for a period of four years

A contract with a new client began on 1 July 2011, expected to add £30,000 to annual revenue However, the overall gross profit margin is likely to fall to 50% for the year to 30 June 2012, mainly because the fleet of three motor vehicles (all held under operating leases) will have to be replaced on 1 January 2012, 12 months earlier than planned They repeatedly suffer breakdowns

or vandalism, necessitating constant repairs and meaning that Mustang has had to reduce the number of visits to some client sites in the notorious Alpha, Bravo and Charlie neighbourhoods One such client owes £20,000, which it is refusing to pay, claiming that Mustang’s failure to patrol at the designated times was directly responsible for the theft of expensive machinery

Security Consultancy

Through this division, Mustang offers professional security advice to public sector bodies, both

in the UK and in Europe, but does not provide any guarding

Peter expects the revenue and gross profit for 2011 (its first full year of operations) to double in the year to 30 June 2012, based on discussions with a number of potential clients However, these discussions are mostly in their early stages and no new contracts have yet been signed

I look forward to receiving your advice

Tom

EXHIBIT 16

PQR Leisure Parks

Poole Business Centre

Poole

Dorset

21 July 2011

Dear Tom,

Tender to become sole security provider to combined Funtimes / PQR business

As you may have heard, PQR recently announced a merger with the local leisure group Funtimes from 1 September 2011 Funtimes owns theme parks, music festival sites, concert arenas, sports grounds and watersports centres in Dorset Funtimes is currently around the same size as PQR

A key attraction for PQR as a merger partner is that Funtimes is heavily involved in the

2012 London Olympics sailing venues, which you will be aware are actually located in Weymouth and Portland as London has no suitable facilities nearby Several ‘showcase’ programmes and ‘trials’ will be held at these sailing venues in the period between now and the Games, starting with the Olympics test events (31 July to 13 August 2011)

In view of the time constraints, Funtimes is responsible for security at these test events, using its existing security provider, Logos However, part of the merger agreement is that the entire security contract for the combined Funtimes / PQR business will be re-awarded with effect from 1 September 2011 (the start of Funtimes’ financial year); and, among other arrangements, this will include a close involvement in the security for the Games themselves in 2012

Purpose of this letter

The purpose of this letter is thus to invite WW to submit a formal written tender to

become the sole security provider for the combined Funtimes / PQR business Olivia

Jenkins (Facilities Director, Funtimes) is simultaneously asking Logos to tender Both

companies will then be asked to make an oral presentation to the Funtimes board No other companies are being invited to tender

We are conscious that our existing contract with you is renewable on 1 July 2012 In the normal course of events we would have been allowing it to run until this date We have been extremely happy with the service received from WW in every respect, but you will appreciate that the renewal timing is now superseded by the merger If you were to be unsuccessful, PQR would have to pay you the contractual penalty for early termination

We are therefore asking WW to tender for the enlarged contract, for a period of three years from 1 September 2011 to 31 August 2014 This will cover another two summer