Case study ep november 2012 ICAEW

November 2012 Case Study: Fluent Speech Limited List of exhibits The following exhibits were included in the material provided as Advance Information: 1 You Charlie Monks, your firm Gr

Wednesday 7 November 2012

(4 hours)

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November 2012 Case Study: Fluent Speech Limited List of exhibits

The following exhibits were included in the material provided as Advance Information:

1 You (Charlie Monks), your firm Griffiths Brett (GB), your client, Fluent Speech Limited (FS)

2 Language schools: UK industry background

3 Fluent Speech Limited (FS): History and background

4 Fluent Speech Limited: Profile of current clients

5 Email from Art Manor (FD of FS) to Enid Lightfoot (GB) dated 5 December 2011: Review

of FS recent financial history

6 Fluent Speech Limited: Management accounts for the three years ended 30 September

2011

7 Email from Art Manor (FD of FS) to Enid Lightfoot (GB) dated 12 December 2011: FS Strategic review and additional information re FS activities

8 FS quarterly cash analysis for the year to 30 September 2011

9 FS accounts receivable schedule for the year to 30 September 2011

10 FS English programmes for speakers of other languages (ESOL), including additional financial and market information

11 FS foreign language programmes, including additional financial and market information

12 FS translation and interpreting work

13 FS learning materials and examination fees

14 News articles

The following items are newly provided:

15 Email dated 7 November 2012 from Enid Lightfoot to Charlie Monks

16 Email dated 6 November 2012 from Art Manor to Enid Lightfoot

17 FS management accounts for the year to 30 September 2012

18 FS quarterly cash analysis and accounts receivable schedule for the year to 30 September

2012

19 Email dated 30 October 2012 from Edwin Sanguine to Art Manor, together with related email to Enid Lightfoot

20 News article, together with an email dated 1 November 2012 from Paz Trans to Enid

Lightfoot

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Fluent Speech Limited: Case Study requirement

You are Charlie Monks, a final-year trainee Chartered Accountant working in the business

advisory department of Griffiths Brett Chartered Accountants (GB) Your client is Fluent

Speech Limited (FS), a company engaged in English and foreign language tuition and

related activities in the UK You report to Enid Lightfoot, a partner in GB

Requirement

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

7 November 2012 from Enid Lightfoot 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:

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%

90%

Applied to your report as a whole

 Demonstrating integrative and multidisciplinary skills 5%

 Presenting appropriate appendices 5%

100%

Of the total marks available, 15% are awarded for the executive summary and approximately 10% for the relevant 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 15 EMAIL

From: Enid Lightfoot

To: Charlie Monks

Subject: Fluent Speech Limited (FS)

Date: 7 November 2012

FS has just completed an important trading year It now requires our assistance in assessing the past year and advice on dealing with ongoing issues arising from its translation work and its English language programmes, as well as new business opportunities associated with Brazil I am attaching the following:

 An email from Art Manor describing FS’s current situation (Exhibit 16)

 FS’s management accounts for the year to 30 September 2012 (Exhibit 17)

 Detailed FS quarterly cash analysis for the year to 30 September 2012 (Exhibit 18(i)), plus accounts receivable information for the same period (Exhibit 18(ii))

 An email from Edwin Sanguine with details of a possible new rental proposal, together

with an email from Art Manor (Exhibit 19)

 News article relating to new business opportunities for FS, together with an email from

Paz Trans (Exhibit 20)

Please draft for my review a report addressed to the FS board The report should comprise:

1 A review of FS’s management accounts for the year to 30 September 2012, as

presented in Exhibit 17

Your review should analyse the revenue and gross profit by comparison with the year to

30 September 2011, both for FS overall and by reference to each of the three primary revenue streams You should also analyse the impact of translation & interpreting

services on movements in cash (Exhibit 18(i)) and accounts receivable (Exhibit 18(ii))

in the year to 30 September 2012 Include in your analysis the Myanmarpic2012 Limited

(MP) problem identified by Art Manor in Exhibit 16

2 An assessment of the new rental proposal with Banbury Building & Properties Limited

(BBP) (Exhibit 19)

Using the information provided by Edwin Sanguine, you should assess the financial impact of the new rental proposal for the years to 30 September 2013 and 2014 from the semester/long English language programmes by calculating the additional

contribution to be earned and discussing the cash implications, identifying any other important factors for FS You should review and comment on the assumptions made by

Edwin in Exhibit 19 and explain any other assumptions you make

3 An evaluation of the potential new business opportunities for FS arising from the market developments associated with Brazil, as identified by Paz Trans from the recent news

article (Exhibit 20)

You should consider all the benefits and risks of the business opportunities for FS, across the range of its three primary revenue streams, both in the UK and in Brazil, including any possible ethical concerns

I look forward to receiving your draft report

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EXHIBIT 16 EMAIL

From: Art Manor

To: Enid Lightfoot

Subject: FS Financial review 2012 and problems with translation & interpreting services Date: 6 November 2012

Please find attached the FS management accounts for the year to 30 September 2012

(Exhibit 17), together with the quarterly cash analysis (Exhibit 18(i)) and accounts

receivable information (Exhibit 18(ii)) for the year

FS experienced a change in activity caused by the London 2012 Olympics and Paralympics (‘the Games’) It was fortunate in that demand for translation services rose steadily in the

12 months before the Games (demand for interpreting has also been high since June 2012 – when participants and their support teams started arriving in the UK) However, in hindsight,

FS may have been nạve in respect of bidding for fixed price translation & interpreting

contracts and then finding that there had been a shortage of skilled linguists to do the work

An additional problem has occurred with one of the organisations requiring our services

during 2012: Myanmarpic2012 Limited (MP), a Myanmar-registered company that promotes tourism to Myanmar (Burma) MP commissioned FS to translate booklets and brochures from Burmese (the main language in Myanmar) into English, to be handed out to visitors to the UK during the period of the Games, encouraging them to visit Myanmar and hence boosting tourism in that country For this work we had to advertise for and recruit new translators Initially the contract went well FS invoiced MP’s UK subsidiary in sterling and the subsidiary paid FS with a 60-day delay from the end of the month of invoice, which is not unusual On the other side, FS paid the Burmese translators within 30 days of them completing their work, having agreed a translation rate approximating to 75% of the fee that FS was charging to MP The contract progressed and the volume of work grew, but MP became a slower payer MP stated that funds were being transferred from Myanmar but were being slowed by exchange controls and by the general volume of business with the UK in the run-up to the Games FS continued to pay its Burmese translators on time

In summary, MP owed nothing at the start of year FS invoiced MP a total of £872,000 as follows: Qtr2 £240,000; Qtr3 £625,000; Qtr4 £7,000 FS received payment for 80% of the Qtr2 invoices: £92,000 in Qtr3 and £100,000 in Qtr4, but no other amounts have yet been settled FS paid the Burmese translators £654,000 in total in Qtrs 2, 3 and 4 MP recently (17 October 2012) sent a letter disputing the quality of the FS translation on one document Since the end of the Games in September, the volume of translation & interpreting work has fallen back to its 2010 level Cash is being received from other translation & interpreting

clients but not at the speed FS requires

Please could your firm analyse our revenue and gross profit during this year by comparison with the year to 30 September 2011, both for FS overall and by reference to each of the three primary revenue streams You should also analyse the impact of translation & interpreting services on movements in cash and accounts receivable in the year to 30 September 2012 Please include in your analysis the MP problem

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EXHIBIT 17 Fluent Speech Limited

Management accounts

Year ended 30 September 2012

£000s

Statement of financial position

At 30 September 2012

£000s Non-current assets

334

Current assets

3,662

Equity

Current liabilities

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Statement of cash flows

£000s Cash flows from operating activities

Adjustments for:

1,316

Change in accounts receivable (1,363)

Cash generated from operations (148)

Net cash from operating activities (343)

Net change in cash and cash equivalents (343)

Cash and cash equivalents at start of year 935

Cash and cash equivalents at end of year 592 Notes to the management accounts

Note 1 Revenue

£000s

Primary

English language tuition programmes 2,314 Foreign language tuition programmes 2,029 Translation & interpreting services 3,339

Secondary

10,503

Note 2 Direct costs

£000s

Primary

Translation & interpreting services 2,548

Secondary

Exam registration & related costs 1,151

6,662

Note 3 Administrative expenses

£000s

Hire of teaching & language facilities 882

Licensing, computer & IT running costs 117

Vehicle running & maintenance costs 62

2,576

Note 4 Non-current assets Freehold Furniture Language Total

land and & fixtures and office

At 1 October 2011 and 30 September 2012 300 112 306 718 Depreciation

£000s Note 5 Accounts receivable

Translation & interpreting services 2,314

2,959 Note 6 Accounts payable

Translation & interpreting services 197

Deferred income: English language fees 351

933

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EXHIBIT 18(i) Fluent Speech Limited

Quarterly cash analysis

Qtr1 Qtr2 Qtr3 Qtr4 2012

£000s £000s £000s £000s £000s Receipts

Primary

Translation & interpreting services 623 554 519 261 1,957

Secondary

2,834 2,220 2,012 1,819 8,885

2,834 2,220 2,012 1,849 8,915 Payments: direct costs

Primary

Translation and interpreting services 597 578 617 705 2,497

Secondary

Exam registration & related costs 334 287 251 279 1,151

1,681 1,569 1,538 1,830 6,618

Payments: other (tax) - - 225 - 225

Deferred income of £351,000 is included in English language receipts

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EXHIBIT 18(ii)

FS accounts receivable 2012

Receivables

at 1 Oct Revenue Receipts Bad debt

Receivables

at 30 Sept

English language clients

Foreign language clients

Translation & interpreting

996 3,339 (1,957) (64) 2,314

Learning materials and

examination fees

Notes

 The Myanmarpic2012 Limited (MP) translation work is included with other translation clients

 The revenue total differs from the accounts figure by £496,000 – deferred revenue transfer

 The cash received differs from the quarterly cash analysis by £351,000 (Exhibit 18(i)) – closing

deferred revenue

EXHIBIT 19 EMAIL

From: Edwin Sanguine (Director of Languages Operations)

To: Art Manor (FD)

Subject: English language programmes

Date: 30 October 2012

You will recall that in March 2011 FS was concerned about its cash flow and seeking to take action to conserve cash We decided to cancel our annual rental of the teaching facility near Banbury (where it could run 12 of its semester/long English language programmes) The financial details of the cancellation were provided in an email to Enid Lightfoot dated

5 December 2011 (Exhibit 5)

The cancellation was in response to the assumption that there would be a downturn in

demand for the semester/long English language programmes because of the potential

restrictions on visas for English language students by UKBA that could affect these

programmes going forward The effect in 2011 was that FS reduced its semester/long

programme in Qtr3 by 12 groups

The visa situation has continued to evolve, but in the interim the semester/long programme has been oversubscribed This is because FS has continued to meet all the UKBA

requirements for candidate selection, contact hours and monitoring of students attending its English language programmes, whilst other more peripheral language colleges have been closed FS assumes that it will continue to meet those requirements in future

A review of demand for the semester/long programmes indicates that FS should be able to re-establish them to run, as before (normally Qtrs 1, 2, and 3) It now appears possible that only some of the relevant factors were taken into account in the previous analysis and that the decision to cancel the original rental agreement was based on immediate cash savings only – whereas it should also have considered other longer-term criteria, such as

contribution

FS has recently contacted the previous landlord, Banbury Building & Properties Limited (BBP), which has indicated that FS can rent the premises again – starting from 1 January

2013 at a rent of £120,000 per annum (payable annually in advance, as before) These

premises can still fit 12 groups per semester

EMAIL From: Art Manor

To: Enid Lightfoot

Subject: English language programmes

Date: 31 October 2012

Please see above email from Edwin Please would your team analyse and advise FS on the proposal to rent the Banbury premises to run the semester/long English language programme on an annual basis

Please assess the financial impact of the new rental proposal for the years to 30 September 2013 and

2014 from the semester/long English language programmes by calculating the additional contribution

to be earned and discussing the cash implications, identifying any other important factors for FS