Case study november 2010 exam paper ICAEW

Wednesday November 2010 (4 hours) CASE STUDY CANDIDATE NUMBER DO NOT TURN OVER UNTIL YOU ARE TOLD TO DO SO When instructed: a b check that your question paper contains all the required pages The Institute’s consecutive page numbering may be found under the base line at the foot of each page; enter your candidate number in the box provided above Number each page of your answer consecutively using the space provided at the top right of each sheet Ensure that your candidate number is written on each page of your answer After the instruction to stop writing at the end of the paper, you will be given five minutes to assemble your answer in this folder Fasten your complete script inside this folder using the hole in the back page and the tag provided Do not include your question paper in the folder Answer folders and examination stationery, used or unused, must not be removed from the Examination Hall Question papers may, however, be retained by candidates Your answer must be submitted on the paper provided by the ICAEW in the Examination Hall Any pre-prepared papers, or papers comprising annotated exhibits from the case material, included in your answer WILL NOT be marked by the examiners ICAEW USE ONLY © The Institute of Chartered Accountants in England and Wales 2010 140617 BLANK PAGE November 2010 Case Study: Eastern Energy Experts Ltd List of 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 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 12 Housing Investor Chronicle: UK government “Feed in Tariff” proposal (April 2010) 13 Email from Jo Carey to Sukanta Woolf: EEE future plans and opportunities in the UK and abroad 14 News articles The following items are newly provided: 15 Email from Sukanta Woolf to you: Report for EEE board 16 Email from Jo Carey to Sukanta Woolf: EEE results to 30 September 2010 and future opportunities 17 EEE management accounts for the year ended 30 September 2010 18 Email from Dany Parker (EEE FD) to Jo Carey: Review of GPS proposal for EEE and other future opportunities 19 Email from Len Wozniak to Jo Carey and all board members: EEE’s solar panel business 20 Recent news articles ICAEW/CS/N10 of 17 BLANK PAGE ICAEW/CS/N10 of 17 EASTERN ENERGY EXPERTS LIMITED Case Study requirement You are Adie Maynard, a final-year trainee Chartered Accountant working for Gunter Jensen LLP You are a member of the business advisory services department and report to Sukanta Woolf Your current client assignment relates to Eastern Energy Experts Ltd (EEE), which provides insulation installation services to households in the East of England Requirement You are required to prepare a draft report for the EEE board, as set out in the email dated November 2010 from Sukanta Woolf to you (Exhibit 15) Your report should comprise the following four elements: • • An executive summary Your responses to the three detailed requirements set out in Exhibit 15, including financial appendices (as required) State clearly any assumptions that you make All workings should be attached to your answer Your report should be balanced across the three detailed requirements, and the following time allocation is suggested: Reading and planning Performing calculations and financial analysis Drafting report hour hour hours Marks allocation All of the marks in the Case Study are awarded for the demonstration of professional skills, allocated broadly as follows: Applied to the four elements of your report (as described above) • Assimilating and using information • Structuring problems and solutions • Applying judgement • Drawing conclusions and making recommendations Applied to your report as a whole • Demonstrating integrative and multidisciplinary skills 20% 30% 25% 20% 95% 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 ICAEW/CS/N10 of 17 BLANK PAGE ICAEW/CS/N10 of 17 EXHIBIT 15 EMAIL From: To: Date: Subject: Sukanta Woolf Adie Maynard November 2010 Report for EEE board Yesterday I received an email from Jo Carey of EEE (Exhibit 16) which I am forwarding to you together with the following items: • • • • EEE’s management accounts for the year to 30 September 2010 (Exhibit 17) Some detailed figures prepared by Dany Parker regarding an opportunity for EEE to work with Victoria Power Supply (VPS) in Australia (Exhibit 18) An email from Len Wozniak about EEE’s solar panel business (Exhibit 19) Two news articles concerning solar panels (Exhibit 20) I have spoken with Jo, and she has asked us to produce a report to the EEE board dealing with a number of matters I would like you to prepare a draft of this report, comprising the 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 I look forward to receiving your draft report Sukanta ICAEW/CS/N10 of 17 BLANK PAGE ICAEW/CS/N10 of 17 EXHIBIT 16 From: To: Date: Subject: EMAIL Jo Carey Sukanta Woolf November 2010 EEE results to 30 September 2010 and future opportunities I am attaching a copy of the management accounts for the year to 30 September 2010 for your information and analysis (Exhibit 17) I would appreciate your analysis for the EEE board of the income and cash flow statements Victoria Power Supply The board would also welcome your review of the Global Power Supply (GPS) proposal for a project in Victoria, Australia set out in Dany Parker’s email (Exhibit 18) In particular 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 The proposal is to work with GPS’s Australian operation – Victoria Power Supply (VPS) – to provide an insulation installation programme similar to that in the UK The project will be located near Melbourne in the state of Victoria, in south-east Australia, which has a similar climate to the UK It appears that the regional authorities in Australia have decided to use the same method as in the UK to attempt to reduce regional carbon dioxide emissions by using power companies to entice households to insulate their homes The Australian market presents an interesting opportunity for us, not only because there is no problem with the language, but we can also use our UK call centre with a new work pattern to take advantage of the time difference (Australia is 9-11 hours ahead of the UK) In addition, Bernie Zhang was born in Melbourne and Len Wozniak did his MBA programme there Both of them are entitled to work in Australia, which makes it an easy market in which to transfer our expertise In terms of size of project for EEE, the overall market is similar to the one in East England However, we believe that we have learnt from our experience in the UK and because of that we hope that we will be able to achieve a better contract conversion rate in Australia than here Solar panel business In the UK, EEE needs to decide whether to expand significantly its solar panel business, and in what way, in order to take advantage of the increasing number of opportunities It is apparent that the solar panel industry is facing a number of important issues as identified by Len Wozniak in his email (Exhibit 19) and in various newspaper articles concerning solar panel supply and power generation (Exhibit 20) The public demands to be more informed on the details of any new industry Some statements made by promoters of the installation of solar panels about the savings to be made may have been overly optimistic, or obscure We are aware of the risks of being tarnished by the general public scepticism and we would welcome your professional views on how we might address them Jo Carey ICAEW/CS/N10 of 17 BLANK PAGE ICAEW/CS/N10 of 17 EXHIBIT 17 Eastern Energy Experts Limited Management Accounts Income statement For the year ended 30 September 2010 Notes Revenue Cost of sales Gross profit Overheads/administrative Earnings before interest, tax, depreciation Depreciation Loss on disposal of non-current assets Operating profit Net finance expenses Profit before taxation Taxation Profit after taxation Dividends paid Profit for the year after tax and dividends £000s 9,949 (6,602) 3,347 (2,127) 1,220 (290) (42) 888 (15) 873 (244) 629 (200) 429 Statement of financial position As at 30 September 2010 £000s Non-current assets Tangible assets Current assets Inventories Receivables Cash and cash equivalents 350 164 816 1,658 2,638 Total assets 2,988 Shareholders' equity Ordinary share capital Retained earnings Total shareholders' equity 100 2,164 2,264 Current liabilities 724 2,988 Total shareholders' equity and liabilities ICAEW/CS/N10 of 17 Eastern Energy Experts Limited Management Accounts Cash flow statement For the year ended 30 September 2010 £000s Cash flows from operating activities Profit before tax Adjustments for: Depreciation Loss on disposal of non-current assets Net finance expenses 873 290 42 15 1,220 305 81 (116) 1,490 (372) (15) 1,103 Change in receivables Change in inventories Change in payables Cash generated from operations Taxation paid Net finance expenses Net cash from operating activities Investing activities Purchase of equipment and vehicles Proceeds from disposal of equipment and vehicles Net cash used in investing activities Financing activities Dividends paid Net cash (used in)/from financing activities (54) 18 (36) (200) (200) Net change in cash and cash equivalents 867 Cash and cash equivalents at start of year 791 Cash and cash equivalents at end of year ICAEW/CS/N10 10 of 17 1,658 Eastern Energy Experts Limited Management Accounts Notes to the accounts Year ended 30 September 2010 £000s Note Revenue Commission from AEPS Installation projects Alternative energy products − Solar panels − Alternative energy stoves 1,354 5,259 2,510 826 3,336 9,949 Total revenue Note Cost of sales Call centre direct costs Staff costs Rent of premises Telephone, internet 122 72 31 225 Installation project costs EEE installation engineers & supervisors Subcontractors Materials 1,165 2,470 1,240 4,875 Alternative energy products Solar panels Alternative energy stoves 1,089 413 1,502 Total cost of sales 6,602 Note Overheads/administrative Staff costs including directors Motor, travelling & subsistence Staff training Other establishment costs Repairs & maintenance Marketing costs General administration & other costs Run-off insurance Total overheads/administrative 933 91 152 265 90 322 129 145 2,127 The run-off insurance premium paid is to cover any remedial work necessary in the next years relating to problems concerning insulation installations already completed by EEE ICAEW/CS/N10 11 of 17 Eastern Energy Experts Limited Management Accounts Notes to the accounts Note Non-current assets Tangible assets Call centre & office equipment £000s Motor vehicles £000s 523 34 (28) 529 726 (252) 474 216 20 (21) 215 1,465 54 (301) 1,218 290 (18) 121 393 136 447 (209) 118 356 118 82 (14) 51 119 96 819 (241) 290 868 350 Cost At October 2009 Additions Disposals At 30 September 2010 Depreciation At October 2009 On disposals Charge for the year At 30 September 2010 Carrying amount 30 September 2010 Note Staff numbers Average number of staff during the year was: Directors Supervisors Engineers Call centre Administration ICAEW/CS/N10 12 of 17 2010 17 10 19 57 Installation equipment £000s Total £000s EXHIBIT 18 From: To: Date: Subject: EMAIL Dany Parker Jo Carey November 2010 Review of GPS proposal for EEE and other future opportunities Further to our discussions about the GPS proposal for the project in Victoria, Australia working with Victoria Power Supply (VPS), please find below a summary of the key information and my estimates and assumptions for that work, based on information supplied by GPS: 1) Victoria has a total population of 5.5 million, with million households/properties 2) 75% of the population of Victoria live in one city area, Melbourne The overall profile of properties in this region is very similar to the East Anglian region in the UK 3) VPS has 20% of the total market of households/properties in this region for EEE to contact 4) 25% of these properties (mainly in Melbourne) are not suitable for insulation as they are apartment blocks or were built to appropriate insulation standards 5) Using EEE call centre statistics and local advisors, the conversion rate of calls to contracts for the remaining potential market may be as high as in 6) The reasons for this in expected conversion rate are: • Based on independent market research, owners of 20% of houses and apartments claim that their property has had loft and/or cavity wall insulation installed since construction • 25% of those called will refuse to consider the scheme and will dislike unsolicited contact • In Australia 20% of this potential market will want to the work themselves – they can claim a fixed fee ‘grant’ for doing this from the authorities in Victoria if they can produce the appropriate receipts for materials • The remainder have indicated a high willingness to participate in an insulation scheme 7) Because of the very high incidence of households with internet connections in Australia (more than 80%), EEE should be able to market its insulation work via this medium – which may make the success rate even higher 8) The timing of the work and the contract/work profile is: Year ended 30 September Signed contracts Installations completed 2011 12,000 10,000 Customers 2012 2013 24,000 28,000 20,000 24,000 2014 22,000 30,000 2015 14,000 16,000 9) Forecast income and related costs: • VPS will pay EEE Aus $200 commission revenue per signed contract plus Aus $600 per completed installation • Call centre costs would be the same percentage of commission revenue as in the UK in 2009 • Only local subcontractors would be used for this work; the total installation cost (including materials and supervision) is estimated at Aus $578 per contract • There will be fixed costs relating to the installation work in Australia estimated at Aus $400,000 per annum • Annual fixed costs in the UK of £1,300,000 per annum will be attributed to the project 10) For project planning purposes, an exchange rate of Aus $2 = £1 has been assumed, being the average rate for the past two years ICAEW/CS/N10 13 of 17 BLANK PAGE ICAEW/CS/N10 14 of 17 EXHIBIT 19 EMAIL From: To: Date: Subject: Len Wozniak Jo Carey and all board members 30 October 2010 EEE’s solar panel business As part of my review of current operations, I am writing to inform the board about a number of critical matters which are affecting the speed of the development of the solar panel business It appears that there are concerns amongst potential customers surrounding the long-term government support for the annual Feed-in Tariff, given the need to reduce public expenditure in all sectors The main concerns are that: • • • • a 25-year subsidy programme has plenty of scope for outright failure, or to face significant reductions caused by changes in current UK Government policies and priorities any future change in government may bring about a change in policy emphasis, or a change in priority funding towards households which meet more stringent economic and social deprivation criteria even if the subsidy time period is maintained, any of the rates for the three specific components making up the overall FIT rates may fall significantly behind future increases in energy unit costs there has been no specific guarantee that FIT rates will rise in line with energy price increases and specific power company charges, only that FIT will rise in line with the Retail Price Index There is also the more immediate and specific problem, as far as EEE is concerned, of the sourcing of solar panels One of the attached articles (see Exhibit 20) encapsulates the issue, which is also being raised in the popular daily press Because of increased prices from its current suppliers, EEE has recently been sourcing about one third of its solar panels from abroad, including Vietnam We are also aware of a number of “solar power generating companies” who are becoming increasingly active in this industry It is relatively easy to set up such a business – particularly at this time EEE needs to consider whether it can, or should, negotiate supply and possibly installation contracts with these solar power generating companies This could become a successful and profitable operation – particularly if these generating companies target lower income households Len ICAEW/CS/N10 15 of 17 BLANK PAGE ICAEW/CS/N10 16 of 17 EXHIBIT 20 The UK House Constructor News Accuracy of solar panel energy generation is questioned October 2010 There is an increasing level of scepticism, accentuated by certain sections of the mainstream press, which relates to the accuracy of the claims concerning the level of energy to be saved by households that install solar panels This is because the savings claimed are quoted in thermal units which the average person does not understand; and the figures quoted are household “averages” which it can be very difficult to verify There has been considerable reaction from the general public, including a large number of solar panel customers, to the news that over the past few months significant quantities of solar panels have been imported from Vietnam and installed in properties throughout the UK There are a number of quality and environmental concerns, including evidence that these imported panels: • have a lower solar energy conversion capability resulting in lower electricity generation per panel • appear to lose their effectiveness at generating electricity more rapidly than other panels • are structurally weak which means the panel is prone to crack and break when subject to high winds • have fixings which are liable to snap after a time, when installed on steep roofs • are not “self cleaning”, meaning that householders have to make arrangements to have them cleaned more regularly to preserve maximum efficiency • are manufactured using non-renewable resources All of this is on top of other negative publicity concerning the qualifications of solar panel installers and the quality of installation work DAILY NEWS RECORD Sunny offer: Free solar panels and lower electricity bills October 2010 Homes throughout the UK are being offered the chance to rent their roofs to “solar power generating companies” in exchange for cheaper electricity bills These companies are proposing schemes which involve the installation of solar panels at no cost to the householder The companies claim that the householders will benefit from a saving in electricity cost of well over 50% of their annual bills – the average home saving will be approximately £340 a year However, the homeowners will be tied into contracts with these companies for 25 years; so if they sell their homes, the buyer will generally have to take on the contract Also, the installers’ businesses might fail, making it hard for homeowners to enforce maintenance contracts These schemes mean that homeowners who cannot afford the typical cost (over £10,000) of installing panels will still be able to take advantage of the UK Government’s FIT scheme for smallscale renewable forms of electricity Energy companies pay homeowners a fixed rate for every unit of electricity generated by this method, regardless of whether the home uses it or it is fed back into the main UK grid Under the “rent your roof” schemes, the solar power generating companies will earn the full FIT of approximately £900 per year, per roof The energy companies propose to pass on the full costs of the scheme to all consumers through their energy bills, meaning that homes without solar panels will end up paying for those who have had solar panels installed ICAEW/CS/N10 17 of 17 ... draft report Sukanta ICAEW/ CS/N10 of 17 BLANK PAGE ICAEW/ CS/N10 of 17 EXHIBIT 16 From: To: Date: Subject: EMAIL Jo Carey Sukanta Woolf November 2010 EEE results to 30 September 2010 and future opportunities... members: EEE’s solar panel business 20 Recent news articles ICAEW/ CS/N10 of 17 BLANK PAGE ICAEW/ CS/N10 of 17 EASTERN ENERGY EXPERTS LIMITED Case Study requirement You are Adie Maynard, a final-year... will affect your chances of success ICAEW/ CS/N10 of 17 BLANK PAGE ICAEW/ CS/N10 of 17 EXHIBIT 15 EMAIL From: To: Date: Subject: Sukanta Woolf Adie Maynard November 2010 Report for EEE board Yesterday