FIRST ILLUSTRATIVE SCRIPT AND EXAMINERS’ COMMENTS The commentary below follows the order and numbering of the script, with reference to the topics in the marking key It should be read in conjunction with the review of the Second Illustrative Script and full Examiners’ Report for this session Examiners’ comments – overview This script was well within the top 25% of all assessed scripts It is a clearly-presented report dealing with many of the key issues, offering sound commercial advice where applicable, and of about average length The content is highly focused, addressing the case requirements as presented and avoiding any pre-prepared introductory paragraphs that can waste valuable time without addressing the key points of the case There is also no cover page and no disclaimer (correctly in this case, as it is an internal document) The impression is very much of a confident candidate eager to dive into the thrust of the case rather than being eased in with some gentle displacement activity There is little irrelevant material Good grades were earned for the executive summary and for all three main topics (Requirement being the strongest) as well as across the four areas of Professional Skills, with AJ (especially under the heading of ‘professional scepticism’) being the weakest In essence, this was a well-balanced script, though with some omissions or sparse sections that prevented it from being an excellent one: Requirement – HLSF; Requirement – sensitivity analysis; Requirement – wider implications Terms of reference and executive summary The executive summary provides an even coverage of the three requirements, with appropriate inclusion of relevant numbers It sets out in its opening words the headline adjusted results of TN and the key explanation for the fall in profits – namely, the decline in ‘Other’ revenue (a fact overlooked by many candidates) This is a powerful and engaging start, and is followed by a similar crisp analysis of the drop in both gross profit and gross profit margin There is nothing on individual costs and, consistently with the main Requirement section (see below), it mentions HLSF only briefly The conclusions and recommendations are short and to the point On the VIS tender, the candidate again begins with the core numbers and goes on to touch on some of the assumptions and practical considerations, with another set of focused conclusions and recommendations As with the body of the report, sensitivity analysis does not feature In respect of the HH issues, within a relatively short piece of text the script manages to deal not only with several of the specific issues – with their possible consequences – but also the vexed question of Ogilvie’s independence, as well as once more offering a clear set of conclusions and recommendations Review of TN business unit [Requirement 1] This part of the report achieved a large number of passing grades After presenting the adjusted results for TN, it goes on to set out, and explore the reasons for, the changes in two key clients It makes good use of the Advance Information and (for TG Music Festival) demonstrates an understanding of the fall in revenue per visitor It also comments on the general heading ‘Other’, which is in fact the largest category identified at Note of the accounts but was often overlooked by candidates There is then a similar coverage of gross profit, for TN overall and then for the two largest clients and ‘Other’ The analysis of TG is noteworthy for appreciating the impact of the ‘Nostalgia Weekend’ on profits rather than just (as for many candidates) on revenue Coverage of costs is fairly brief: the candidate discusses only food and consumables, and not the other major caption (wages), but even this is perhaps misguided as Project Greenbuy, referred to indirectly (“efficiencies being introduced”), was only launched after the year end © The Institute of Chartered Accountants in England and Wales 2013 Page of 11 The section on HLSF is also short and indeed it breaks off abruptly in mid-sentence The candidate may have noticed a possible time overrun and decided to stop after at least addressing the main figures in the income statement (albeit making sure to include a pertinent sentence under ‘Conclusions’) Thus there is no evaluation of the analysis and in particular no comparison with 2011 The section ends with a reasonable set of conclusions on some of the key findings from the financial statement analysis, followed by some commercial recommendations that pick up some observations made within the earlier analysis on the large clients In general, the section reveals a candidate with a good commercial awareness and an ability to explain logically movements in financial statements Evaluation of VIS tender [Requirement 2] This was also answered well, with passing grades being earned primarily for the calculation (see also commentary on Appendix below) and for conclusions and recommendations The calculated figures for revenue and gross profit from the VIS contract are set out in a concise opening sentence, leaving plenty of time to cover the discursive elements of the requirement These comprise sections respectively headed ‘Assumptions and Estimates’ and ‘Practical Considerations’ – in line with the wording of the requirement – but both are relatively brief and so not earn the passing grades that were available for a more developed discussion For ‘Assumptions and Estimates’, the candidate deals with only three variables: gross profit, pupil numbers and staff costs Although they are covered in detail (with some good commentary on food price inflation, the impact of the recession on school fees and current levels of employment – well rewarded under Assimilating & Using Information), this is at the expense of the numerous other points that could have been addressed, notably take-up percentages Perhaps as a direct result of this, the candidate does not have enough material with which to carry out any sensitivity analysis on the project Although this was not specifically asked for, it should have been a logical next step to illustrate the risks inherent in what was a contract beset by question-marks The scope offered under ‘Practical Considerations’ is wider, with some astute points made in relation to payment terms, kitchen equipment and the overall potential impact on Palate’s portfolio However, a number of other issues could have been identified from Exhibits 16 and 17, such as the short timetable and any ICT requirements Similarly, the candidate could have earned higher grades at the other two Applying Judgement boxes (‘Evaluates contract risk/benefit’ and ‘Professional scepticism’) by extending the narrative into such areas as conference revenue and benchmarking of VIS figures against those for existing schools clients The candidate again closes with a reasonable set of conclusions and recommendations These have earned passing grades by incorporating the key findings However, no reward was given for suggesting that sensitivity analysis should be performed – this was a task for the candidate Overall, this was another commercial section, albeit characterised by depth of content rather than breadth Response to HH issues [Requirement 3] Requirement gained 50% of passing grades, particularly by dealing in turn with each of the issues raised in Ogilvie’s letter It could have done better still with improved coverage of ethical issues, more professional scepticism and an assessment of wider implications While not all issues were specifically mentioned (Spanish fruit being the chief absentee), the candidate discussed enough of them to achieve good credit There are relevant references to other case material (wastage statistics, contractual responsibilities for kitchen equipment, FSA rules, horsemeat), showing © The Institute of Chartered Accountants in England and Wales 2013 Page of 11 that the candidate had assimilated the case material more effectively than many others and reflected in a passing grade at ‘Describes business issues and wider context’ However, there was a surprising failure to mention Project Greenbuy, which underpinned the scenario for Requirement and indeed was rather more relevant here than at Requirement (see above) Project Greenbuy was the central thrust of Palate’s 2013 strategy – one of the areas of ‘wider implication’ that candidates were expected to pick up on Others were more directly connected to HH itself: its cost-cutting programme and its proposal to open a new customer restaurant With regard to ethics and professional scepticism, the candidate has discussed the apparent pressure being placed on Ogilvie but has not thought through the full ramifications of this There is also no consideration of the fact that Ogilvie’s review took place at only one HH location and for only a week The script ends with a series of conclusions – sufficient for a passing grade – as well as a list of recommendations These are mostly rewarded as ‘actions’ under Applying Judgement In general, by addressing the individual issues and not stopping to reflect on their wider impact, the candidate has missed the more overarching recommendations that arise from the scenario – eg, prioritised action plan, review of other HH sites As with sensitivity analysis at Requirement 2, a common inappropriate recommendation (“commission an independent review of the Ogilvie report”) has not been rewarded Overall paper: Appendices The candidate has included two Appendices, one each relating to Requirements and Appendix tabulates the key figures used for Requirement 1, showing changes both in absolute terms and as percentages There is no working for the adjustments to TN’s starting figures, but the calculations are correct For TN overall, it also contains numerical analysis of the large clients, including revenue per visitor (but not visitor numbers themselves) It presents all the relevant figures for HLSF, which makes it even more surprising that the narrative on this client was incomplete (see above) Appendix sets out succinctly the calculation for the revenue and gross profit expected to arise from the VIS contract Again, all numbers here are correct and the workings are labelled By not going on to flex the figures, the candidate has missed the opportunity to earn a CC grade here Overall paper: Report The script is generally well written with good grammar, punctuation and spelling Colloquialisms are few and far between In addition, the manuscript is very neat and legible Overall, it has met the requirements, is balanced across the main topics and demonstrates a strong commercial understanding of the case scenario © The Institute of Chartered Accountants in England and Wales 2013 Page of 11 FIRST ILLUSTRATIVE SCRIPT Section – Executive Summary 1.1 Financial Perfomance of TN Overall revenue has fallen by 8.2% in TN to £5.819m in 2013, excluding the HLSF contract This arises largely due to a drop in revenue from other contracts of 17% to £1.893m as several annual events were postponed / cancelled to avoid clashing with the Olympics and Jubilee Some of these events may recur next year, but will likely require retendering Gross profit in TN has dropped by 12.8% to £940k, with a fall in GPM from 17.0% to 16.2% This largely arises as margins under the VP contract have fallen by 2.5% to 13.1%, due to a fall in visitor numbers causing wastage and efficiencies to worsen 1.1.1 Conclusions and Recommendations Overall performance in TN has been poor, due to loss of several smaller contracts and underperformance under others The HLSF contract may no longer be feasible as recent admission price increases have damaged visitor numbers We would recommend that the board: 1.2 Retender for any postponed contracts which are due to be held next year Consider seeking a variation of the VP contract to reflect admission prices now charged Evaluation of VIS tender The contract is expected to yield revenues of £1.116m over years, with a gross profit of £136k This however is subject to assumptions on improvements to gross profit margin which are considered unachievable given no inflation has been accounted for Furthermore the existing terms allow the school to change the expected pupil numbers, removing the aspect of guaranteed revenue Risks also may arise if the school enters into liquidity problems having only opened recently However the contract would build on existing experience working in independent schools, and allow greater saving and efficiencies 1.2.1 Conclusions and Recommendations There is a risk that any perceived guarantee under this contract on revenues may be changed by the school However if this can be mitigated (eg revised terms), then a tender should be prepared We would recommend that the Board: carry out independent research to determine if expected pupil numbers appear reasonable propose revised terms introducing a true minimum revenue guarantee © The Institute of Chartered Accountants in England and Wales 2013 Page of 11 1.3 OCC Report Issues with wastage suggest inefficiencies as the reported 10% is above both industry average (8%) and 2012 wastage (5%) Ill maintained kitchen equipment and food labelling causes more significant concerns however, as this could lead to food poisoning, personal injury, reputational damage and punitive action from the FSA The information however does raise concerns that undue pressure was placed on OCC to overstate failings noted This is of particular concern if actively sanctioned by HH, as it falls outside of our strategic boundaries 1.3.1 Conclusions and Recommendations The report is extremely negative, particularly raising concerns on labelling and equipment being dangerous However the report may be overstated in terms of negativity Overseas suppliers could cause damage to reputation, as a lack of traceability is introduced We recommend that the board: perform immediate tests on equipment reported as faulty independently review the OCC report not engage in relationships with overseas suppliers Section – Review of TN financial performance 2.1 Revenue Excluding the HLSF contract, revenue in TopNotch (TN) has decreased by £518k (8.2%) from £6.337m in 2012 to £5.819m in 2013 Revenue under the V Park (VP) contract has dropped by 16.5% to £1.202m, as admission prices are now being charged to the site, resulting in a drop in visitor numbers Revenue per visitor has actually risen however, as once visitors have paid entry, they are more likely to pay for food and drinks, as they are not just seeking a free day out This trend will increase in 2014 as it is the first full year of admission prices being charged The TG music festival (TG) contract has seen revenue rise by 19.1% to £1,583m, as this year’s ‘Nostalgia Weekend’ has encouraged higher visitor numbers However revenue per visitor has dropped from £3.81 to £3.62 as sales prices were reduced This will not recur next year, as prices return to normal and by agreeing to take part in Nostalgia Weekend Palate may have improved its chances at retendering in 2014 Other contracts have seen a drop of 17% to £1.893m (exc HLSF) as several annual events were cancelled or postponed to avoid clashes with the Olympics and Jubilee These events may recur next year but there is a good chance Palate will need to retender for them 2.2 Gross Profit Gross profit in TN has decreased by £138k (12.8%) from £1.078m in 2012 to £940k in 2012, accompanied by a fall in gross profit margin (GPM) from 17.0% to 16.2% The VP contract has seen a fall in gross profit of 30.0% to £157k, with a shift in GPM from 15.6% to 13.1%, due to the drop in visitor numbers noted above decreasing revenue As food must be bought © The Institute of Chartered Accountants in England and Wales 2013 Page of 11 in advance, this has increased the amount of wastage at VP, as well as increasing the proportion of costs which are unavoidable (ie operational gearing) This could be adjusted for going forward through efficiencies but may mean the contract is no longer a viable venture The TG contract has seen a rise in gross profit of 5.1% to £249k, although a decrease in GPM from 17.8% to 15.7% This is due to the forced lower prices at Nostalgia Weekend not reflecting the effect of food price inflation on costs This is especially relevant as it has been noted that food price inflation often outstrips general inflation (source: Apex Insight) Other contract gross profits have fallen by 15.9% to £312k (exc HLSF), with a shift in GPM from 16.3% to 16.5% This is largely due to lost revenues as noted above, but also indicates some of those contracts lost were achieving lower margins and so may not be worth retendering for 2.3 Cost of Sales The largest change in CoS has arisen though food and consumables, which has fallen by £292k (11.2%) This is largely due to efficiencies being introduced and wastage falling, fitting in with Palate’s ‘green’ and environmentally friendly image Overall CoS is down 7.2% (£380k), which is less than the noted drop in revenues (see above), indicating good efficiencies have somewhat mitigated a fall in income 2.4 HLSF Revenue has spiked in 2012 to £530k due to the Queen’s Jubilee increasing the popularity of outdoor fairs However it fell by 46.4% in 2013 as admission price increases and forecast bad weather reduced footfall Gross profit was down in 2013 by £128k (83.7%) from 2012 as costs were sunk into hot food and revenues fell (see above) CoS fell, particularly food which dropped 34.6% (81k), mostly in line with revenue decreases However some 2.5 Conclusions & Recommendations Overall performance in TN has been largely worse than in 2012, due to bad performance under the VP contract and loss of several smaller contracts This is mainly due to several annual events being cancelled / postponed to avoid clashes with the Olympics or Jubilee Performance at HLSF has worsened due to a heavy increase in admission prices, and forecast bad weather There have been improvements in GPM on several contracts however, indicating efficiencies have limited the effect of lost revenues We would recommend that the Board: Perform profitability analysis on those contracts lost due to the Olympics / Jubilee If considered profitable, prepare for retendering by performing appropriate diligence and research work Negotiate a variation of the VP contract terms to reflect the admission prices now being charged (eg lower concession charge) © The Institute of Chartered Accountants in England and Wales 2013 Page of 11 Section – Evaluation of VIS tender opportunity 3.1 Financial Implications Expected revenues from the contract over years are £1.116m, with expected gross profits of £136k 3.2 Assumptions and Estimates This however is subject to the expectation that gross profit margins will climb steadily each year, which appears unrealistic initially, given the pressure that economic conditions are putting on margins Food inflation is expected to hit 8% in 2014, but surveys have shown that several caterers are able to pass these increases on to their customers with little to no resistance However public trends and bad harvests can dramatically change food prices so an improvement in margin of 5% per year is likely unachievable As well as this, the contract makes broad assumptions that the school will hit its maximum attendance in two years, which may be unlikely given the recession has reduced the disposable income households have to spend on private school fees Furthermore, given the school can change expected visitor number (with notice) there is in fact no strict guarantee of revenues Concerns may also arise that the school be unable to accommodate all diners over a standard lunchbreak, as their dining area only holds 600 against expected diners of 1,215 in year Assumptions have also been made that staff costs will be in proportion to meals served, and be roughly similar to existing contracts However, although current levels of unemployment mean that casual staff are readily available, some staff must always be a fixed cost (eg executive chefs), and therefore will not vary Furthermore, too heavy a reliance on casual staff inevitably means staff are less well trained, impacting on both quality and efficiencies, both of which may put a contract at risk 3.3 Practical Considerations The contract allows for payment in advance, therefore allowing Palate to cater for expected pupil numbers without raising concerns on margins However this could produce either high wastage or a shortage of meals if not properly controlled VIS does have a kitchen on site, meaning Palate does not require additional investment in equipment Clarification is needed though on the suitability of the equipment and responsibility for maintenance and replacement Palate will be able to draw on its existing experience at catering for local independent schools in the area, and may even be able to introduce savings and efficiencies through use of existing delivery routes This contract would also dilute Palate’s portfolio and make the company less exposed to loss of key contracts In 2013 69.1% of Palate’s revenues came from only contracts The tender would be against Ravenous, plus other possible competitors Success against national competitors (such as Ravenous) was only 40% in 2012, as they are able to offer lower prices and higher commitments due to economies of scale Given VIS is a new school concerns may also arise over its liquidity, especially if expected pupil numbers are not achieved Additional concerns may also arise given previous issues with the Jordi tender process, indicating VIS may have deeper issues with independence and ethics © The Institute of Chartered Accountants in England and Wales 2013 Page of 11 3.4 Conclusions and Recommendations The evaluation shows that the VIS contract would generate a positive return However this is based on several assumptions, including those around gross profit margin, which are considered likely to be unachievable Furthermore, risks arise given the school is able to change the numbers guaranteed under the contract Overall, if a true guaranteed minimum can be agreed, and the contract remains profitable, a tender should be submitted We would recommend that the board: negotiate / propose revised terms incorporating a true minimum revenue clauses should also be considered banning pupils from leaving the premises for meals, to increase take up independent research should be carried out to assess the likelihood of forecast pupil numbers being achieved sensitivity analysis should be perform to assess how key factors (food inflation, average increases etc) will impact on expected return Section – Ogilvie Catering Consultants (OCC) Report 4.1 Wastage The OCC report details problems with wastage being at 10% above the industry average of 8% This increases costs and damages Palate’s reputation both with HH and other customers if made public This is well above Palate’s 2012 wastage of 5% so requires investigation, possibly due to inclusion of meals not finished 4.2 Kitchen Equipment Maintenance of kitchen equipment is the responsibility of Palate, but replacement is HH’s responsibility, suggesting there may have been a breakdown in communications between the two This should be treated as a priority as this could lead to either personal injury (faulty equipment) or food poisoning (incorrect heating) 4.3 Food Labelling Failure to correctly label food could cause allergic reactions, or damage to reputation, in turn even leading to potential punitive action from the FSA 4.4 Use of low grade meat This falls away from Palate’s image of providing local, traceable produce, and indicates problems with the current procurement procedures Failure to address this could cause damage to reputation, especially given the recent horsemeat scandal has increased the public requirement for traceable food and a shift towards organic produce (source: thegrocer.co.uk) 4.5 Sustainability – Energy This is a stated contract term, and so failure to meet it may breach the contract, a particular risk given HH represents 18.1% of all Palate revenues However given rising fuel costs above inflation, achieving a drop of 10% may not be feasible, especially given this requirement does not account for existing efficiencies in place © The Institute of Chartered Accountants in England and Wales 2013 Page of 11 4.6 Sustainability – Fuel The number of deliveries is likely proportional to revenues and given HH revenues have only fallen by 6.1% to 2013 and 25% reduction may again be unfeasible However if lorries were noted which were not full, this does indicate inefficiencies, and so involvement of a logistics expert may be required 4.7 Pressure placed on OCC There is a risk noted that OCC were placed under undue pressure and hence the report produced is overly negative This impacts on both Palate through unnecessary costs being incurred to rectify problems, and on HH through possible savings and increased bargaining power regarding the proposed contract extension This represents a relatively high risk as while HH is Palate’s main customer, such undue pressure falls aside from Palate’s ethically high standpoint as a company There is also a risk going forward that HH will continue to exert pressure, knowing they are Palate’s largest contract 4.9 Conclusions and Recommendations The report is fairly negative, pointing out several significant concerns surrounding food safety Of particular worry are issues noted regarding unsafe (or potentially so) equipment and labelling Other points however, regarding sustainability may not be feasible given current economic conditions The report does carry a risk of being overstated however, which is worrying if caused by HH placing undue pressure on OCC Furthermore, proposals to source ingredients from overseas are likely to damage Palate’s reputation, and its ‘local traceable’ image We would recommend that the Board: perform immediate testing on kitchen equipment used under the HH contract review and revise the policy on food labelling, and update staff training accordingly negotiate revised sustainability clauses with HH given economic conditions commission an independent review of the OCC report to determine its reliability not engage in relationships with overseas suppliers yet, as current suppliers are sufficient and meet Palate’s strategic aims © The Institute of Chartered Accountants in England and Wales 2013 Page of 11 Appendix – TN exc HLSF Revenue Cost of sales - Food and consumables - Wage costs - Location fees - Transport 2013 £’000 2012 £’000 5,819 6,337 (518) (8.2) (2,304) (2,330) (165) (80) (4,879) 2,596 (2,471) (115) (77) (5,259) 292 141 (50) (3) 380 (11.2) (5.7) 43.5 3.9 (7.2) (138) (12.8) Gross profit 940 1,078 GP margin 16.2% 17.0% 2012-13 Variance £’000 % HLSF Revenue Cost of sales - Food & - Wage costs - Location fees - Transport - Total Gross profit HSLF GPM (%) 2013 8.8 GP Margin 2012 28.9 Variance £’000 % 2011-12 Variance £’000 % (246) (46.4) 218 69.9 81 16 15 118 (34.6) (16.4) (50.0) (37.5) (31.3) (85) (32) (15) (9) (141) 57.0 49.2 100.0 128.6 59.7 (128) (83.7) 77 101.3 2011 24.3 Revenue and GP by contract – TN (enc HLSF) Revenue variance £’000 % VP TGMF HG Other (exc HLSF) (238) 254 (146) (388) (16.5) 19.1 (11.3) (17.0) 2013 7.61 3.62 2012 6.89 3.81 GP variance £’000 % (67) 12 (24) (59) (30.0) 5.1 (9.8) (15.9) GPM 2013 % 13.1 15.7 19.5 16.5 Revenue per visitor: VP (£) TG © The Institute of Chartered Accountants in England and Wales 2013 Variance 0.72 (0.19) Page 10 of 11 Appendix 2014 2015 2016 Total Revenue expected: - expected take up (nos x take up %) 270 675 1,215 - price per meal (£) 2.50 2.75 2.75 - revenue per day (£) 675 1856.25 3341.25 Total annual revenue (£’000) (based on 190 days) 128 353 635 Expected GP margin 5% 10% 15% 35 95 Expected gross profit (£’000) © The Institute of Chartered Accountants in England and Wales 2013 1116 136 Page 11 of 11 ... (%) 2 013 8.8 GP Margin 2 012 28.9 Variance £’000 % 2 011 -12 Variance £’000 % (246) (46.4) 218 69.9 81 16 15 11 8 (34.6) (16 .4) (50.0) (37.5) ( 31. 3) (85) (32) (15 ) (9) (14 1) 57.0 49.2 10 0.0 12 8.6... 59.7 (12 8) (83.7) 77 10 1.3 2 011 24.3 Revenue and GP by contract – TN (enc HLSF) Revenue variance £’000 % VP TGMF HG Other (exc HLSF) (238) 254 (14 6) (388) (16 .5) 19 .1 (11 .3) (17 .0) 2 013 7. 61 3.62... (16 5) (80) (4,879) 2,596 (2,4 71) (11 5) (77) (5,259) 292 14 1 (50) (3) 380 (11 .2) (5.7) 43.5 3.9 (7.2) (13 8) (12 .8) Gross profit 940 1, 078 GP margin 16 .2% 17 .0% 2 012 -13 Variance £’000 % HLSF Revenue