Case study november 2012 marks plan ICAEW

In summary these requirements comprised: 1 an analysis of the 12-month financial statements for FS to 30 September 2012 against specifically defined yardsticks: revenue and gross profit

EXAMINERS’ COMMENTS AND MARK PLAN

Contents

Page Part 1: Executive summary

Part 2: The Case Study examination

Part 3: Commentary on candidates’ performance

Part 4: Appendices

Appendix 1: Analysis of 30 September 2012 financial statements 17

Appendix 2: Contribution and cash calculations re Banbury proposal 19

Part 5: Marking Key

PART 1: EXECUTIVE SUMMARY

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

Overview of performance

74.1% of all candidates sitting the paper passed, compared with 74.1% in July 2012 and 73.9% in November

2011 The pass rate reflects the fact that this case was of a similar standard to all recent case studies As in recent papers the examiners had introduced factors in both Requirements 1 and 2 which made those

requirements slightly less predictable

The Advance Information (AI) informs candidates that the Fluent Speech Limited (FS) case concerns a

company operating in the language tuition and translation sector FS was created in 1993 by its four directors, who are equal shareholders FS currently earns its revenue from three primary streams: (i) English Language Tuition (ELT); (ii) Foreign Language Tuition (FLT); and (iii) Translation and Interpreting (T&I) work It also earns revenue from secondary revenue streams: exam fees and sales of learning materials The candidate is in the role of Charlie Monks, a final-year trainee Chartered Accountant working in the business advisory department of Griffiths Brett reporting to the engagement partner Enid Lightfoot FS is a new client

The FS sales mix between the three primary streams has been altering over time and since 2009 revenue from ELT, traditionally the dominant stream, has been declining with revenue from FLT increasing steadily and revenue from T&I increasing significantly, albeit from a smaller base From the management accounting

information in the Exam Paper (EP) it can be seen that there has been a significant increase in overall revenue and that the sales mix had continued to alter – largely as a result of increased translation and interpreting work associated with the 2012 Olympics The company maintains adequate cash resources

The FS case requirements in the EP followed on from the information provided in the AI In summary these requirements comprised:

(1) an analysis of the 12-month financial statements for FS to 30 September 2012 against specifically defined yardsticks: revenue and gross profit (overall and by primary revenue stream), as well as an analysis of the receivables and cash relating to T&I work and the consideration of the specific problem caused by one T&I client Myanmarpic2012 Limited (MP);

(2) an analysis of a proposal to re-open a teaching facility, which FS had previously closed, for use on its

semester ELT programmes, considering both contribution and cash flow implications;

(3) an evaluation of the risks and benefits to FS of new opportunities which might arise as result of increased trading by potential and existing clients with Brazil

As in previous case studies the exam rubric specifically told candidates that an executive summary was

to be provided and that the report should be balanced between the three elements This exam rubric is provided as an important guide to candidates and following that guidance is crucial to a candidate’s success

Tutor firms have commented that “the requirements for this case were fairly predictable given the Advance

Information” and that these requirements were “clear and unambiguous” It was also stated that “students were not asked to do anything unusual, unfair or outside their capabilities, but they will need to have been well

organised to complete it in the time allocated” The Case Study examiners consider that these tutor comments

reflect an accurate summary of this case study and of its target to assess candidates’ professional skills

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 Successful scripts were balanced, clear and focused They dealt with the requirements as set and contained little superfluous information At the very top end scripts were of a quality that was a delight to assess

Candidates who failed did so for a number of different reasons Most commonly, candidates who failed had

misallocated their time and did not balance their answers between the three requirements In a number of instances candidates had not developed their analysis sufficiently in terms of depth or breadth and therefore that section of the report also lacked sufficient judgement, conclusions and recommendations which led to a fail

Review of professional skills in FS

Assimilating and using information (A&UI) Almost without exception candidates provided good evidence of

being competent under this heading manifested by good integration of AI and EP information and a clear use of relevant facts provided in the case and drawn from the identifiable wider context, such as the UKBA visa policy

Structuring problems and solutions (SP&S) As always this was the core of the assessment and the majority of

candidates demonstrated good analytical skills picking out the relevant factors, accurately calculating any impact, and considering and assessing the information which had been derived However, there were scripts with weak or incomplete analysis, in one or more requirements, and because this is the critical fulcrum of any section of the report, it is difficult for a candidate to recover from poor quality work in this area

Applying judgement (AJ) Good candidates demonstrated the application of judgement with good evaluation of

their analysis based on FS case information – this included appropriate professional scepticism Weak

candidates struggled to demonstrate their judgement by failing to critically evaluate assumptions presented in the case material or to reflect on their own, frequently limited or incomplete, analytical assumptions

Conclusions and recommendations (C&R) In most scripts the conclusions and recommendations flowed

logically from the previous work in that section of the report and were of a high standard However, weaker candidates presented inadequate conclusions, and limited or no recommendations – commercial or otherwise

Review of FS requirements

Requirement 1 was structured to start with the wider financial statement analysis of revenues and gross profit

which then focussed in on one revenue stream and in turn on one client Most candidates demonstrated the required level of competence in performing the financial analysis of revenues and gross profit – helped by good preparation from the AI information Weaknesses were more apparent in the detailed review of receivables and cash relating to the T&I work and in the consideration of the specific problem caused by the slow paying client

MP – these were components of the requirement which were less easy to pre-prepare As always in financial statement analysis, strong candidates demonstrated their professional competence Weaker candidates

demonstrated a lack of analytical ability, and as a consequence this was combined with inadequate judgement and often banal conclusions – which are critical weaknesses in basic professional skills

Requirement 2 assessed the proposal to re-open the Banbury centre for ELT semester programmes The

request from FS was to assess the contribution and cash flow impacts because, as one tutor firm accurately observed, “the original decision [to close – as shown in the AI] had muddled these elements due to the rental saving straddling the year-end” Candidates were also specifically asked to review and comment on the

assumptions made Strong candidates provided comprehensive analysis and evaluation of the whole issue Weak students frequently did not provide clear analysis of the cash implications, as requested, nor did they develop their contribution analysis to consider a breakeven position or margin of safety for the semester

programmes Their consideration of assumptions (AJ) was also very weak

Requirement 3 was a consideration of new opportunities which might arise as result of increased trading by FS

clients, potential and actual, with Brazil Successful candidates presented a clear analysis of the benefits and risks involved, including the relevant ethical issues, demonstrating their professional competence Weaker candidates failed to provide an appropriately balanced consideration of the issues, by not considering all

revenue streams or the different issues associated with the three companies identified in the EP These scripts were therefore weak on judgement and many had poor conclusions

Overall and Executive Summary (ES) All reports contained appendices – the vast majority of which were clear and relevant Most reports contained an Executive Summary which covered all sections of the report indicating

a structured, well-balanced and planned approach to answering the whole case The majority of scripts had a fairly even spread of marks between the three requirements with a slight bias towards Requirement 1 and a slight bias against Requirement 3 All successful candidates demonstrated the ability to assimilate, analyse and assess the information in the FS case and write a relevant appropriate report A small minority of the scripts showed evidence of time pressure – probably caused by poor planning

Conclusion The examiners consider that FS was a topical case study, set in the current economic climate,

against a background of the London Olympics which allowed good candidates the opportunity to demonstrate their professional skills in the answers It exposed the weaknesses of the poorly prepared candidate and those

who could not think in situ in response to the specific issues included in the EP which had to be addressed in

the case requirements This assessment should provide assurance to member firms that students, qualifying as ACAs, have been properly assessed and possess the range of skills and abilities required in the workplace

PART 2: THE CASE STUDY EXAMINATION

Scenario for the paper (Advance Information)

The case study relates to Fluent Speech Limited (FS), an owner-managed company operating in the language tuition and translation sector FS was created in 1993 by its four directors, who are equal shareholders The candidate is in the role of Charlie Monks, a final-year trainee Chartered Accountant working in the business advisory department of Griffiths Brett reporting to the engagement partner Enid Lightfoot FS is a new client

Four weeks prior to the examination, candidates were provided with a 50-page package of information,

containing a series of exhibits relating to FS These comprised 14 exhibits:

1 You (Charlie Monks), your firm Griffiths Brett (GB), and 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

10

FS accounts receivable schedule for the year to 30 September 2011

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 services

13 FS learning materials and examination fees

14 News articles

Analysis of Advance Information (AI)

By studying and analysing this Advance Information an overall picture of FS could be established (Additional commentary by the examiners is provided in italics and in brackets.)

Exhibit 1 provides a brief background to the candidate Charlie Monks, the firm Griffiths Brett (GB) Chartered

Accountants and one of its clients, Fluent Speech Limited (FS) FS is an established business operating in the

UK in the language training market It has three primary streams of revenue: English Language Teaching (ELT); Foreign Language Teaching (FLT); and Translation and Interpreting services (T&I)

Exhibit 2 gives a brief overview of language schools and the related UK industry background It introduces the

legal and regulatory environment in the UK, including the UK Border Agency (UKBA) and Tier 4 student visa entitlement It also identifies the issue of accreditation for those organisations providing ELT and the process by which this is carried out It further identifies the qualifications for teachers and for participants A short broad introduction to the business model for this type of organisation is also provided

Exhibit 3 is a short exhibit which provides information on the business, technical and linguistic expertise of the

four directors of FS, who are also its only shareholders It also provides details of the main FS location in the Midlands, and the historical development of its three primary revenue streams

Exhibit 4 provides information concerning the profile of FS students and clients by revenue stream ELT

students comprise individuals from a variety of countries both in Europe and throughout the world ELT clients comprise employees of foreign owned commercial organisations which have bought into companies in the UK The majority of these client companies are in the motor industry which has a heavy concentration in the

Midlands, but clients also include other industry organisations such as those in the pharmaceutical and

computer software industry FS works with non-native English speaking managers at all levels offering a tightly targeted language programme to improve their general, and industry specific, English language expertise FLT clients comprise individuals who intend to work abroad and managers and employees from commercial

organisations (predominantly in the motor industry) will be involved in visits, secondments or transfers abroad

As with the ELT programmes the FLT programmes are clearly focused on the role and the industry in which the participants operate Initially the T&I work came from existing language clients but this has developed in breadth and scope

Exhibit 5 is an e-mail from Art Manor, the finance director of FS, to Enid Lightfoot with a business review of

recent FS financial history This e-mail accompanies the FS management accounts for the three years

2009-2011 The review identifies the uncertainty in the ELT market caused by changes in the UK government policy

on non-EU overseas student visas, which has led to a potential reduction in the numbers of the students able to attend programmes in the UK, with a particular impact on ‘marginal’ schools Despite the fact that FS is not a marginal school it has still been involved in a change of direction to a greater emphasis on foreign language work together with an increased focus on translation and interpreting work, this latter as a result of demand caused by the 2012 Olympics FS has been involved in upgrading its language facilities in its permanent

locations but has also conducted a commercial review of other locations which are rented as additional teaching

provision In the light of uncertain demand and "because of the expected need to conserve cash", Edwin

Sanguine, the director of languages programmes, proposed that FS cancel one of its Banbury property rental

agreements The financial details of the cancellation are provided (Although the figures provided are accurate, the decision is based on restricted criteria – immediate cash savings – which candidates could have, and should have, questioned and re-calculated using a broader and more relevant contribution and breakeven analysis)

The review also identifies that the FS foreign language programme is in the process of recovery and growth as

a result of similar recovery and growth in the motor industry T&I activity has increased significantly in 2011 as a result of work relating to the 2012 Olympics

Exhibit 6 provides 5 pages of management accounts and notes, for the 3 years to 30 September 2011 These

accounts provide the following key information:

 FS has achieved moderate overall revenue growth from 2009-2011 (circa 5% over the period) at a time of recession in the UK (The three primary revenue streams need further analysis to determine what has been happening – see revenue stream analysis below)

 Gross profit has varied over the three years but has remained above 40% (This is a solid performance; the modest variations may indicate changes in sales mix FS is performing consistently despite the recession)

 There are variations in the absolute level of FS administrative expenses over the three years (This variation may indicate possible weak FS control in 2010 but the situation appears to be back in line in 2011)

 Operating profit has been variable and in 2010 was significantly lower at £362k than the other years The

percentage figures are: 2009 (7.7%); 2010 (4.4%); 2011 (9.0%) (This variation appears to have been an aberration as the subsequent recovery indicates that control has been re-established)

 The balance sheet shows that FS has a moderate investment in non-current assets (nothing remarkable in these figures: see Notes to the accounts below)

 The company holds small inventories (consistent with its information concerning sales of learning materials)

 There has been a large increase in level of accounts receivable in 2011 The ratios of accounts receivable

to revenue are: 2009 (14.1%); 2010 (7.1%); 2011 (18.3%) (see below: this may indicate one or more of a number of causes: poor credit control; an alteration in the revenue mix; changes in the terms and conditions

of activities; an alteration in seasonality or the timing of sales)

 Cash and cash equivalent balances appear adequate (see commentary on statement of cash flows)

 The level of accounts payable does not appear to be significant and the variations give no cause for

concern (see below)

 Overall the balance sheet appears solid

 The statement of cash flows shows a variable level of cash being generated in the three years in line with revenue and cost variations in activity identified in the income statement above The company uses the cash to invest steadily in the purchase of non-current assets each year and to pay its taxes The company pays no dividends There are some variations in cash flow caused by changes in the collection of accounts receivable but in each year the company’s cash and cash equivalents balance at the end of the year is

substantial and gives no cause for concern (This statement requires reading and understanding and should

be reviewed again after the information on the notes to the accounts has been assimilated One reason for the high year-end cash balances will be the fact that ELT students pay their semester fees in advance)

 From the Notes to the accounts the following information can be seen:

o Revenue The detailed trends in primary and secondary revenue streams show the changing sales mix Over the three years there has been a significant decline in ELT revenues, a steady

improvement in FLT revenues and a substantial increase in T&I revenues particularly in 2011

o Direct costs This note provides information which indicates the comparative margins on each revenue stream All revenue streams achieve gross margins above 50% with the ELT programmes being most consistent: 2009 (54%); 2010 (57%); 2011 (53%) FLT programme margins have declined: 2009 (62%); 2010 (54%); 2011 (51%) T&I margins have been improving slightly: 2009

(52%); 2010 (57%); 2011 (57%)

o Administrative expenses have remained at a consistent absolute level over the three years

(approximately £3,000k) with a higher figure in 2010 (£3,082k) which has been brought back down

in 2011 (£2,974k) The three years provide information which shows that the two largest costs within this heading are salaries (including directors), which are rising steadily (to £973k in 2011), and hire of teaching and language facilities (£982k in 2011), which is declining in line with combined

(ELT and FLT) teaching programmes (The fact that administrative expenses have remained

somewhat static over time may indicate poor control but the individual expenses under this heading would need to be analysed The action taken by FS to terminate the rental of Banbury would have been a factor in reducing the cost of renting ELT facilities)

o Non-current assets information is provided for all the three years since the beginning of October

2008 (there are no apparent large or unusual transactions or changes in patterns of expenditure during that time and the depreciation rates appear economically realistic

o Accounts receivable show a consistent picture apart from a large increase in the T&I receivable in

2011 (£996k) by comparison with 2010 (£429k) (The pattern of trading activity and collection can

be seen in detail in later exhibits (8 & 9) but this change indicates either poor credit control or changing terms and conditions, or timing of activity in generating revenue)

o Accounts payable show that only a small amount of the total in accounts payable comprises trade payables (T&I = £146k out of £916k in 2011) Included in the figure are other payables and accruals taxation and social security and, importantly, a significant but declining figure for deferred income

(this is a telling indicator of the future direction of the ELT semester programme)

(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 story and current financial position of the business)

Exhibit 7 is another e-mail from Art Manor to Enid Lightfoot which concerns the FS strategic review for 2012

together with additional detailed financial information about FS activities This “strategic review” is a compilation

of the opinions of the FS directors from a board meeting in October 2011 – it identifies around 20 different items

The discussion by the FS board was "realistic but broadly optimistic because, despite the recession, it was felt that the impact of the 2012 Olympics would be the major positive factor" (It should also be apparent that some are more likely, or plausible, than others – they are not of equal importance)

Exhibit 8 is the quarterly cash analysis for FS for the year to 30 September 2011 together with notes relating to

the key items in the cash analysis It provides a detailed yet succinct financial summary of the years revenue

and cost activities It can be seen to reconcile with the main headline figures in the management accounts (This

is an important exhibit and candidates should have spent time studying and understanding it to identify and become familiar with the peaks and troughs of financial activity and the significant material items affecting the quarterly cash flows)

Exhibit 9 is a schedule of FS accounts receivable for the year to 30 September 2011 Brief explanatory notes

are provided in order that this schedule can be reconciled with the relevant figures in the management accounts

and the quarterly cash analysis shown in the previous exhibit It is a financial précis of the revenue streams

(This is another detailed financial exhibit which provides a lot of information concerning the different revenue streams and the degree of control maintained over each stream Candidates should have analysed this exhibit and made sure they understood the key components and key financial messages which it contained)

Exhibit 10 provides information concerning the FS English language programmes for speakers of other

languages (ESOL) The information provided explains the various types of programme offered: executive, intensive and semester/long and the target audiences are for each different type of programme It also provides

a breakdown of fees and costs based on its target minimum numbers for each category of programme (This exhibit provides an insight into the English language tuition activity in which FS is engaged and allows

candidates to consider comparative contribution analysis for each category of programme This financial

information can be reconciled approximately to figures in the FS management accounts)

Exhibit 11 provides information concerning the FS foreign language programmes This exhibit explains the

various programmes offered mainly to executives and senior employees of multinational companies, based in the UK, prior to overseas placements or activities This exhibit also provides a breakdown of fees and costs for

foreign language tuition for each category of programme based on minimum target numbers (From this

information candidates can consider comparative contribution analysis for each category of language

programme This financial information can be reconciled approximately to figures in the FS management

accounts)

Exhibit 12 provides information concerning FS translation and interpreting services (T&I) The exhibit details the

standards which FS strives to adhere to; the historical development of this T&I work and the nature of T&I activity It also identifies the qualifications and standards expected of those individuals engaged by FS in T&I work Some very brief financial information is provided together with details of the split in activities and the cost

structure for both translation and interpreting work (It has been identified that T&I activity has been increasing in recent years and it will continue to increase particularly in the period leading up to the 2012 Olympics Rates of pay and fees to clients are not fixed and depend on the complexity of the task and the timeframe or urgency of the work)

Exhibit 13 is a brief exhibit which provides information on the two secondary streams of revenue: sales of

learning materials and examination fees It earns the latter as an accredited assessment centre for English language and foreign language examinations both for its own students and as an examination centre for other

candidates (This short exhibit is provided for completeness but it is clear that it is not possible to conduct any detailed financial analysis, such as the split of revenue, based on this information except to note that these two secondary revenue streams appear to provide a reasonable contribution for FS and that in 2011 their combined revenue exceeded any single primary revenue stream)

Exhibit 14 comprises a series of news reports concerning different topical items

 The first article (Exhibit 14a) deals with a highly topical and relevant issue: that of the withdrawal of college accreditation preventing it from sponsoring overseas students coming to the UK on a student visa to study English language, together with the knock-on effect on those individual students affected by this UKBA

decision (This article covers in more detail an issue already identified in the AI which is the potential impact

on the English language student market of the tightening up of UKBA rules for visas and college

accreditation)

 The second article (Exhibit 14b) describes the result of research carried out into NHS language expenditure The research identifies that the NHS has spent significant sums in recent years on translation work

Because of the sums involved and the current need to reduce NHS costs proposals are to being made to

reduce this expenditure by a variety of different routes.(This article serves as a possible warning concerning the contraction of demand for T&I work by an organisation which is a current client of FS)

 The third article (Exhibit 14c) is a summary report on a UK Foreign Office trade fact-finding mission to Russia and Brazil whose aim was to promote future trade by UK organisations The article identifies the

shortage of language specialists for both these countries (This article draws attention to the significance of the BRIC economies and the possible opportunities for a company such as FS to provide T&I support to organisations going into these markets It also draws attention to the different business practices and the difficulty of obtaining appropriately qualified, relevant linguists)

 The final article (Exhibit 14d) deals with the incident of an Olympic train poster reading like ‘gibberish’ to Arabic speakers because of the substitution of one font by another in the print process The security poster had been translated under a contract with FS who took responsibility for the error, apologised publicly – which was accepted – and took immediate remedial action at its own expense as well as not invoicing the

train company for any of the work done (This article identifies a series of issues concerning the translation work: peak capacity; expertise and timeframe of the work all contributed to lower standards The problem is detrimental to FS and its reputation but the article also identifies the prompt steps taken by FS to manage and solve this problem: a good example of FS re-establishing business trust)

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 dated 7 November 2012 from Enid Lightfoot to Charlie Monks: Report for FS board

 Exhibit 16 – email dated 6 November 2012 from Art Manor, finance director of FS, to Enid Lightfoot: FS Financial review 2012 and problems with translation and interpreting services

 Exhibit 17 – FS management accounts for the year ended 30 September 2012 (3 pages)

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

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

On the instruction page candidates are told that the report should be balanced across the three detailed

requirements and must also include an executive summary

The time allocation suggested to candidates was:

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 three pages of financial information provided in Exhibit

17 and the two additional pages of financial information in Exhibit 18 Using the new financial information it

would then be essential to assess the 2012 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 gross profit both overall and by revenue stream together with the impact of T&I services on movements in cash and accounts receivable Candidates also had to include in the analysis the MP problem identified by Art Manor Similarly assessing the new rental proposal for the BBP property meant assimilating the

new information in Exhibit 19 and tying it back to the relevant information in the AI to perform an integrated

calculation which would allow the additional contribution calculation and cash implications to be considered for

both years 2013 and 2014 However, candidates were also required to review and comment on the assumptions made by Edwin Sanguine and to explain their own assumptions The third requirement entails an assessment of the potential new business opportunities for FS arising from the market developments associated with Brazil, including the benefits and risks and any ethical concerns for FS With appropriate 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 his email Art Manor requests an analysis of the revenue and gross profit during the year to

September 2012 by comparison with 2011 both overall and by reference to each of the three primary revenue streams He explains the broad change in FS activity during the year as a result of the 2012

Olympics and requests the analysis of T&I services on movements in cash and accounts receivable in the year to 30 September 2012, and in particular the problem with MP should be included A financial summary

of MP activity is included (This is an exhibit which determines the financial analysis to be conducted This analysis should start with a broad review of revenues and gross profit and then gradually focus down

through the analysis of the three primary revenue streams onto the impact of one of those revenue streams (T&I) on cash and accounts receivable, and within that revenue stream the activities of one client MP This requires a structured and disciplined approach to financial analysis.)

 Exhibit 17 This exhibit comprises three pages showing the management accounts for the year to 30

September 2012: 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 primary and

secondary streams; similar details covering direct costs; a schedule of administrative expenses; details of the non-current assets; accounts receivable and accounts payable The 2012 set of accounts are presented

in a similar format to the 2011 information presented in the AI (Exhibit 6) and should have posed no

problem for any candidate to assimilate (This should 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 2012 should have been anticipated and detailed analysis on AI figures was essential preparatory work)

 Exhibit 18 This exhibit comprises two pages showing the FS quarterly cash analysis for the year to 30

September 2012 and the FS accounts receivable 2012 The information shown in this exhibit is in a similar

format to the information shown in the AI (Exhibits 8 & 9) and should have meant that all properly prepared

candidates would assimilate this information very quickly (Provided that candidates had done their

preparatory work and made a point of understanding the equivalent exhibits in the AI then working through these summary financial schedules would have been straightforward and rapid - candidates were being clearly directed to the precise sub-section of this information which needed to be analysed)

 Exhibit 19 The email from Edwin Sanguine concerns the rental of the teaching facility near Banbury – where FS could run 12 of the semester/long English language programmes It is cross-referenced back to

Exhibit 5 where details of the cancellation of the original rental agreement were provided In his email

Edwin identifies some of the critical criteria surrounding this decision together with details of the new rental proposal (£120,000 per annum payable in advance) to start in January 2013 Edwin also explains “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” (This email is a close parallel to information in the AI except that the decision is going in the opposite direction from that taken previously Provided that candidates had analysed the equivalent information in the AI carefully and had come to their own conclusions about the validity or otherwise of the basis of the decision taken by FS in the AI then this EP exhibit and the related requirement should have posed no problems.)

 Exhibit 20 This exhibit comprises a newspaper article which concerns a “Follow-up mission to Brazil”, the

original visit having previously been described in the AI (Exhibit 14), together with an accompanying email

from Paz Trans which identifies the related contacts being made with FS by potential and existing clients

(This exhibit identifies different opportunities which might occur for FS as a result of these potential and

existing clients’ new areas of activity in seeking trade in Brazil.)

The information provided in the EP follows on from the financial and commercial story told in the AI FS total revenue has increased substantially but the individual revenue streams need to be analysed in order to

determine what has been driving that growth Similarly direct costs have increased significantly and further activity stream analysis will be needed to identify what has actually occurred The inclusion of the quarterly cash analysis and accounts receivable schedules and the details provided concerning the client MP means that the

financial information provided to 30 September 2012 will enable comprehensive but tightly focused financial statement analysis to occur – a basic professional skill and one which candidates must demonstrate The

calculation of the impact of the new Banbury proposal in terms of both contribution and cash and the need to

review and comment on the assumptions surrounding this proposal requires structured financial data analysis

together with a focus on applying judgement to this issue The evaluation of the potential new business

opportunities for FS arising from the market developments associated with Brazil across its three primary revenue streams considering all the benefits and risks and any possible ethical concerns requires a structured review of those revenue streams against the potential and existing client possibilities This review of the

opportunities includes a sceptical and ethical review of the issues The individual requirements clearly describe

the detailed process of analysis which should be followed in developing the report

For Requirement 1 the financial statement analysis of the management accounts for FS for the year to 30

September 2012 had to be focused on specific key features The required analysis is detailed in Exhibit 16

which spells out clearly how the analysis is to be conducted For the 12-month income statement the analysis should be of revenue and gross profit, both in total and across the three primary revenue streams The cash and accounts receivable, including the MP problem, should concentrate on the T&I revenue stream only This financial analysis should have been a straightforward exercise numerically, but it then had to be developed with

a clear commentary based on that numerical analysis

Requirement 2 requires some basic financial data analysis to calculate the additional contribution as well as the

cash implications of the new rental proposal, as identified by Edwin in Exhibit 19 Given that there are some

question marks over the previous decision to stop renting the Banbury premises – largely because the

information straddled the year-end and that decision was subject to analysis on the basis of short-term cash criteria only – candidates should have already been alerted to this type of issue in their preparatory analysis Candidates were also made to focus on the assumptions provided by Edwin as well as explain any other

assumptions they might make – this focus was made with the intention of requiring candidates to clearly display their judgement

Requirement 3 requires a balanced analysis of the opportunities for FS arising from the market developments associated with Brazil This analysis should focus on the three business organisations, two potential clients and one existing client, who have contacted FS concerning these opportunities and should consider the potential across its three primary revenue streams The most important aspect of this analysis is to focus the analysis and consider the potential revenue from these three different types of client organisation It is also clear that the analysis by revenue stream should make candidates consider which streams are likely to benefit from this new opportunity Candidates had to identify and evaluate the benefits and risks and assess the possible ethical issues by an integrated review of AI and EP information

Summary of grades available

The Examiners identified 5 headings under which grades would be awarded, corresponding to the requirements:

 Executive summary

 FS Financial analysis / Myanmarpic2012

 Assessment of Banbury rental proposal

 Evaluation of new business opportunities

 Overall paper

Candidates were rewarded according to how well they demonstrated, under each of these topics, their

application of four skills:

 A&UI Assimilating and using information

 SP&S Structuring problems and solutions

 AJ Applying judgement

 C&R Drawing conclusions & making recommendations

For each topic, there were a number of ‘boxes’ under each of the four skills, representing specific areas in which the skill was to be demonstrated Within each box, candidates were awarded one of five available grades:

40

The marking key is now established as follows:

 the number of assessment boxes available is 40;

 all boxes contain a range of assessment bullets (normally 5 or 6)

 the executive summary is assessed whereby each column corresponds to a requirement;

 there continues to be an emphasis on appendices (comprising 2 separate boxes under ‘Overall paper’)

PART 3: COMMENTARY ON CANDIDATES’ PERFORMANCE

Professional skills

Assimilating and using information

In each requirement candidates had to make extensive use of the AI as well as using the information in the EP

to assimilate and organise material in order to build their answers In the majority of scripts, candidates

demonstrated good A&UI skills in each requirement The advance case material provided the background

information relating to FS’s business history and its financial results and revenue streams Detailed information concerning direct costs was also provided enabling the determination of contributions from each of the revenue streams and further detailed information was also provided to enable further sub-analysis under component categories Information concerning FS strategy and its clients’ activities was also provided as a platform for subsequent strategic analysis

In all three requirements A&UI was also assessed by the consideration of how well a candidate considered relevant FS business issues and the wider (business) context Within each topic clear broader threads could have been identified – but these needed to be contextualised and integrated into the report Bald, unlinked statements, or sometimes simply some key words, or phrases, concerning matters such as the “economic

recession” or the “2012 Olympics factor” were scattered like confetti throughout the reports of weaker students

who failed to make any meaningful link between these broader factors and their actual impact on FS

Encouragingly most candidates did understand the complexities posed for FS concerning the UKBA visa policy – being negative in general for the ELT market in the UK but positive specifically for non-marginal language operations, such as FS Strong candidates also identified appropriately the relevant potential and economic power of Brazil as a key factor

Structuring problems and solutions

The majority of candidates demonstrated good skills in structuring problems and solutions To a large extent this

is because most candidates, especially the successful ones, follow the requests and instructions given under each requirement which enable them to structure this analytical aspect of their work accordingly The SP&S component is the core of each section of the report These professional skills assessment criteria follow the requirement instructions in each section: financial analysis of revenue, gross profit, receivables and cash under Requirement 1; the calculation of the financial impact of renting the Banbury property and reviewing the

assumptions given in Requirement 2; the benefits, risks and ethical issues surrounding the business opportunities

in Brazil for Requirement 3

Strong candidates tended to work methodically through each of the steps requested within their report ensuring that they dealt with the points in sufficient, but not time-consumingly excessive, detail whereas the scripts of weaker candidates were frequently incomplete or unbalanced This applied in particular in financial analysis where the sub-analysis was patchy and where the analysis of the T&I receivables and cash was superficial Similarly the stating and/or questioning of the assumptions which were provided as a basis for the Banbury calculation in Requirement 2 was very weak In Requirement 3 the analysis of the potential ethical issues

identified in the case by weaker candidates was skimpy

Because this analytical section of the report is the nucleus around which further any discussion revolves any fundamental weakness in this aspect of a candidate’s work will also inevitably affect the subsequent sections of judgement, conclusions and recommendations

The majority of candidates demonstrated that they could structure problems and provide solutions with

Because the analysis for Requirement 1 was frequently the most comprehensive section of any candidate’s report it followed that the judgement shown in Requirement 1 was of a higher standard than the judgement demonstrated in other sections of the report Good candidates wrote evaluations of their financial analysis which were logical and appropriate Weaker candidates who had not performed such a thorough analysis at the level

of detail requested made superficial or only brief judgement concerning the FS financial analysis

Good candidates also demonstrated the necessary level of scepticism and balance in their judgement This could be seen in Requirement 2, when considering and evaluating, but not dismissing, the uncertain elements affecting previous calculations Similarly stronger candidates structured the evaluation of the new business opportunities in Requirement 3 across both the potential client axis as well as across the primary revenue streams using appropriate scepticism in critically evaluating the possible work for FS associated with Brazil Weak candidates failed to evaluate many, or any, assumptions or critical factors, and therefore their scripts had limited or very poorly developed AJ sections As tends to be the situation a weakness in applying judgement throughout the report can be positively correlated with a failure overall

Conclusions and Recommendations

Strong candidates provided appropriate, clear conclusions throughout their reports which followed on from their previous analysis and judgement sections Where appropriate to the requirement these good candidates also provided sound, worthwhile, commercial recommendations,

Weaker candidates failed to provide many conclusions and those that were provided were brief and rarely developed and frequently did not follow logically from their scripts Weaker candidates very rarely offered any recommendations or else made particularly poor or inappropriate recommendations

Executive summary (ES)

Good executive summaries covered all three aspects of the report equally and were appropriately aimed at the target audience – the FS board In good scripts this section was presented as a précis of a candidate’s original analysis aimed at informing the FS board of the context and the outcome of the work conducted in the report Where relevant they contained clear numerical information together with appropriate analytical extracts from the body of the report (and the relevant appendices) Well-written executive summaries used the essential points from the judgements provided in the main body of the report and presented clear conclusions and

recommendations for their readers Good summaries were concise without being too short and were around 15% of the length of the body of the report

Weaker candidates frequently tried to introduce each section of the executive summary by restating some basic information from the case which did not advance the knowledge of the FS board in any way – this would not impress any client (or any examiner) and just wasted time An additional problem was that many weak

candidates failed to present the key facts and any of the important figures from the report, or only provided partial numerical information without an appropriate yardstick against which to set it In some cases this

appeared to be a problem of poor ES writing technique and was a failure to bring the appropriate facts forward from the main body of the report However there was also the difficult problem of attempting to summarise a weak or unbalanced section of the main report – which inevitably leads to a weak or unbalanced executive summary Although there was evidence of poor planning and time management in weaker scripts this only existed in a small number of candidates

A number of students made mundane and inappropriate statements to the FS board, such as: “The company will need to look for a lot of new business in order to overcome the hole left by the end of the 2012 Olympics because this work will not be there next year” Weak candidates also made inappropriate recommendations “the

FS directors will need to decide which one of them will visit Brazil to find out what is needed there” These

remarks are way below the level of competence which a candidate needs to demonstrate being both wrong and badly written – it is the clients of FS who will be operating in Brazil not FS Candidates who write such poor quality statements in their scripts receive little credit for their efforts

Requirement 1: FS Financial analysis / Myanmarpic2012

This financial statement analysis requirement was well answered by the vast majority of candidates, with

appropriate use of an appendix (see later), although there were some significant specific areas of weakness in many scripts The fact that financial statement analysis is a consistent element in the Case Study reflects the real-life work of a Chartered Accountant and candidates are expected to be able to conduct this type of analysis with sufficient and – better still – clear competence in order to pass the exam This Requirement was structured

to start with the wider financial statement analysis of revenues and gross profit which then focussed on one revenue stream and in turn on one client

Most candidates demonstrated the required level of competence in performing the financial analysis of revenues and gross profit – helped by good preparation from the AI There were exceptions: “The main cause is

expensive Olympics prices which, fortunately, are a one-off.” (It is not entirely clear whether for prices the candidate means costs, and if so which costs.) The vast majority of candidates could recognise and explain the

impact of the changing revenue mix as the lower margin T&I activity grew in 2012 More significantly there was

a noticeable drop in the quantity and quality of the analysis concerning the analysis of the impact of T&I activity

on receivables and cash and on the further analysis relating to the MP problem – caused to a certain extent by

the fact that this specific analysis could not be pre-prepared and candidates had difficulty thinking in situ One

major aspect of this was that candidates frequently did not consider the pattern of T&I activity in assessing the impact on the FS income statement or statement of financial position – even though the detail provided on the

MP activity indicated the pattern of work being conducted relating to Olympic translation projects Furthermore the interpreting work relating to the Olympics would all have occurred in the last quarter of the FS financial year

(Although an increased level of activity had obviously occurred throughout the year it was highly likely that more activity occurred in the months nearest to the 2012 Olympics and this would have had a distorting effect on the level of outstanding debts at the year end and the cash flow)

Despite the comments above this requirement produced the best grade profile of the three requirements and there were enough competent grades (SC or CC) in the vast majority of scripts As always weaker candidates made a less convincing attempt at the financial analysis Their weaknesses appeared particularly in the analysis

of T&I and in discussing the MP problem – in some cases this was reduced to a few short sentences

Frequently their analysis appeared not to be conducted in the context of the broader business environment surrounding FS – despite many token, rather than considered, references to the 2012 Olympics