Case study november 2010 marks plan ICAEW

They comprised: 1 an analysis of the 12 month financial statements to the 30 September 2010 against specifically defined yardsticks the results for each of the business activities agains

EXAMINERS’ COMMENTS AND MARK PLAN

Contents

Page Part 1: Executive summary

Part 2: The Case Study examination

Part 3: Commentary on candidates’ performance

Requirement 3: Strategy for increasing revenue from solar panels 17

Part 4: Appendices

Appendix 1: Analysis of 30 September 2010 financial statements 19

Appendix 2: Calculation of profitability from total 5-year Australian project 24

Part 5: Marking Key

PART 1: EXECUTIVE SUMMARY

Introduction

This report covers the November 2010 Case Study exam It is issued in conjunction with two illustrative scripts and related Examiners’ commentaries The first script was in the 2nd quartile of all assessed scripts; the second failed the exam In reviewing these scripts, it is important to be aware that it is rare for a script to be uniformly

‘bad’ or uniformly ‘good’ A successful script will present appropriate coverage of all requirements but may include errors of calculation or logic; an unsuccessful script may contain one appropriate section and/or some good points but be let down by poor or incomplete text elsewhere

Unsuccessful candidates will also find key points from the November 2009 and July 2010 Examiners’ Reports,

together with guidance in the Case Study Manual which forms part of the ICAEW Learning Materials and

includes specific chapters on Introductory Financial Analysis and Ethics

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

In addition, the Examiners have provided an appendix on ethical issues, reflecting the increased emphasis on ethics (including professional scepticism) in the Case Study exam

Overview of performance

76.0% of all candidates sitting the paper passed, compared with 78.7% in July 2010 and 73.3% in November

2009 The pass rate reflects the fact that, as well as the competence in performing the financial analysis in Requirement 1, there was a general improvement in performing basic analysis for Requirement 2 – although among weaker candidates there was a noticeable failure to identify the economic benefits and risks requested Requirement 3 provided clear differentiation with strong candidates demonstrating their competence but weaker candidates failing to provide appropriate consideration of the specific issues they were required to address In both Requirement 2 and Requirement 3, the performance of candidates in dealing with issues of professional scepticism and ethical issues was of variable standard, particularly by weaker candidates

The Eastern Energy Experts Limited (EEE) case concerns an owner-managed company working with a major power supply company, providing insulation installation advice and services to households based in the East of England This work, which is dependent on indirect funding from the UK government through UK power

companies, is part of the UK government’s commitment to reduce UK carbon emissions under the Kyoto

accord EEE is also involved in the alternative energy supply business For its insulation work, EEE works closely with Anglo Eastern Power Supply (AEPS) a subsidiary of Global Power Supply (GPS) a major

international operator

EEE was created in 2005 specifically to take advantage of government incentives for energy conservation It is owned by its four directors who have equal shares in the business and are all involved heavily in company operations From the Advance Information (AI) it can be seen that the company has been financially very successful in its first four years of operations – up to 30 September 2009 – generating significant profits, and that the directors have received a good return on their original investment by way of a stream of large dividends,

as well as their salaries The business operates with a number of business activities: a call centre which

generates commission revenue from contacting potential customers and signing them up for insulation

installation contracts; the insulation operation which is delivered by both own labour and significant numbers of sub-contractors; and the sale of alternative energy products – particularly solar panels

From the AI it can be determined that the call centre and the installation of insulation operations are heavily dependent on each other From the information concerning potential market size and the success rates for signing up customers and installing the insulation, it is possible to determine that this insulation project is

coming to an end Sales of solar panels have been increasing since 2005 and, from information provided in the

AI (and massive UK government publicity), are expected to surge from April 2010 as the government pushes its Feed in Tariff schemes for households which install solar panels as an alternative energy supply

The EEE case requirements in the Exam Paper (EP) followed on from the information provided in the AI They comprised: (1) an analysis of the 12 month financial statements to the 30 September 2010 against specifically defined yardsticks (the results for each of the business activities against the prior year and the cash flow

statement for the year); (2) an analysis of the proposal to consider expanding the EEE insulation installation business into Australia, and; (3) an assessment of the economic benefits and risks relating to EEE’s proposed strategy to develop its business from solar panel sales and solar panel installation in the UK In the exam rubric,

candidates were specifically told that an executive summary was to be provided and that the report should be balanced between the three elements

Tutor firms have commented that for candidates “this case study was straightforward” and “a reasonable paper” The Examiners concur with these views

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 The majority of scripts were balanced, clear and focused; dealing with the requirements set, and had an average length of 23-27 pages (including approximately 4-6 pages of appendices)

Candidates who failed did so for a variety of reasons As always, a significant number failed because of poor

exam technique either by not planning their time appropriately such that they failed to finish a section or the executive summary; or by not answering the overall paper in sufficient detail For others the reasons for failure rested within each requirement, perhaps with the misguided belief that a strong performance in one section of the report would shield a weak performance elsewhere The normal criteria for passing the Case Study remain achieving a majority of competent grades in all sections of the report

Requirement 1 assessed the fundamental skill of financial statement analysis Weak candidates provided poor

overall analysis of the income statement such as by not looking at absolute figures and only providing

percentage changes without providing a yardstick figure for comparison There was also a failure to properly

analyse the cash flow statement In the case study exam, failure to perform well in this key requirement is closely correlated to failure overall However performing well in this single requirement is not a guarantee of success, and this was especially true of those who continued for too long with their analysis and failed to

manage their time and balance their report As always in this type of financial statement analysis, strong

candidates demonstrate their fundamental competence, while weaker candidates provide poor judgement and often banal conclusions which demonstrate a fundamental weakness in a vital basic professional skill

Requirement 2 assessed the candidates’ ability to perform financial data analysis by considering the proposal

to expand the EEE’s insulation operation to Australia by way of a similar project linked to another GPS

subsidiary in Victoria This required a straightforward analysis of a proposal similar to the existing UK operation and strong candidates performed well in this requirement Most candidates demonstrated their competence in the basic calculation but many stumbled with the sensitivity analysis requested concerning success rates and possible Aus $:£ exchange rate movements Weaker candidates also failed to demonstrate sufficient

professional scepticism concerning the numerical information supplied and assumptions made, as well as having difficulty identifying opportunities and threats (with solutions)

Requirement 3 assessed the candidates’ skills in strategic analysis and ethical considerations The answers by

weaker candidates to this requirement were often very thin and did not cover the necessary aspects of the requirement In particular their strategic review was focused too heavily on general issues and did not take into

account what was actually requested concerning the economic benefits and risks of EEE’s strategy concerning

solar panels In addition many weaker candidates failed to identify and address the ethical issues identified in

the EP in a balanced and appropriate manner Apart from evidence of poor time management, the weakness in this requirement provided evidence of poor preparation and a general naivety concerning how to deal with these sorts of problematic issues from a real life and professional perspective

As in most case study exams the majority of candidates planned their work and wrote a balanced answer to the EEE case There were a large number of scripts with an even spread of good marks right through to the very top end, and, as always, the top scripts provided impressive answers This indicates the ability by the majority of candidates to assimilate, analyse and assess the information in the EEE case and write a relevant appropriate balanced report Overall the range of grades was as wide as in previous case study exams A minority of the scripts for the EEE case showed evidence of poor time management

Overall the examiners consider that EEE was a relevant case, with highly topical elements which allowed good

candidates the opportunity to demonstrate their skills It exposed the real weaknesses of the under-prepared candidate and those who did not manage their time appropriately, as well as those who did not demonstrate

adequate professional skills in their answers As was stated by one of the tutor firms: “the current format [of the case study] of financial statement analysis, financial data analysis and a more discursive requirement should

give great comfort to member firms that students, qualifying as ACAs, 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 Eastern Energy Experts Limited (EEE), an owner-managed company engaged in working with a major power supply company, providing insulation installation advice and services, which also supplies alternative energy supplies It is located and operates in the east of England

Four weeks prior to the examination, candidates were provided with a 46-page package of information,

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

1 About you (Adie Maynard), your firm (Gunter Jensen LLP) and your client (Eastern Energy

Experts Limited)

2 The Kyoto accord and its implications for UK carbon emission control

3 Eastern Energy Experts Limited client file extracts: history and structure

4 Eastern Energy Experts Limited client file extracts: operations

5 Letter from Jo Carey (EEE MD) to Sukanta Woolf (GJ)

6 EEE management accounts: Summary for the 4 years ended 30 September 2009

7 Email from Bernie Zhang (EEE Call Centre Director) to Kristoff Hughes (GJ) : EEE call centre

and customer development

8 EEE operational activity data in the 4 years to 30 September 2009

9 Email from Len Wozniak (EEE Operations Director) to Kristoff Hughes: Insulation installation

10 Average insulation costs per job

11 Average insulation costs per job

12 Website extracts

 The arguments for and against the Kyoto accord

 Extracts from UK government information re energy efficiency incentives

 How the Feed in Tariff (FIT) scheme works

13 Housing Investor Chronicle: UK government “Feed in Tariff” proposal (April 2010)

14 Email from Jo Carey to Sukanta Woolf: EEE future plans and opportunities in the UK and

abroad

Analysis of Advance Information (AI)

By studying and analysing this Advance Information an overall picture of EEE could be established (Additional

commentary by the examiners is provided in italics and in brackets)

Exhibit 1 provides a brief background to Gunter Jensen LLP (GJ), a UK firm of Chartered Accountants and

Registered Auditors in which the candidate works It also provides a brief introduction to EEE as a client

company and the industry in which it operates

Exhibit 2 provides an introductory summary of the Kyoto accord and its implications for UK carbon emission

control This background information identifies the broader context in which this case is set It details the fact that the work which EEE conducts – which is funded by the UK government through UK power companies – is

a part of the UK government's attempt to meet its commitment to reduce UK carbon dioxide emissions under the Kyoto accord EEE is primarily involved in the household loft insulation programme

Exhibit 3 gives information on EEE’s history and structure detailing the background of the founding members –

who are its directors and equal shareholders – and explains the history and development of the company EEE acts as a bridge between the power companies that operate in the East of England and their customers who choose to have their property insulated under the UK government carbon emission control programme

Because of personal and historical links, EEE operates predominantly on behalf of Anglo Eastern Power Supply (AEPS) – a subsidiary of Global Power Supply GPS) – and uses the AEPS database of customers for its

marketing purposes Information is also provided concerning the estimate which EEE had made concerning its potential market of approximately 300,000 AEPS customers The agreement between AEPS and EEE means that EEE receives a fee of £200 per successful side contract, and subsequently receives a further average fee

of £600 for installing the insulation This information provides candidates with the details of the strong financial

relationship between EEE and AEPS It also contains useful information on the estimates of market size for EEE

Exhibit 4 provides more detailed information on EEE’s business operations Call centre operations are the

responsibility of Bernie Zhang The call centre is based in the UK and uses UK residents to make the calls to customers using the AEPS database If the call is positive the customer’s details are passed to the EEE

installation team and a copy of customer information is also sent to AEPS [This is a fairly simple operation and

given the financial arrangements it is potentially very profitable] Installation work is the responsibility of Len

Wozniak The installation work may be conducted by an EEE installation team or else by subcontractors When the work is completed satisfactorily EEE sends a customer’s Certificate of Satisfaction to AEPS together with their invoice for the full cost of the installation AEPS processes the invoice and pays EEE, in two instalments,

within 60 days [This is clearly the most complex part of this operation and one which requires a large workforce

and careful organisation] Sales of alternative energy products (AEPs) are also responsibility of Len Wozniak

Sales of these items had been as a result of customer enquiry either by telephone or through the EEE website The two main items are solar panels, which sell for £6000 - £8000, and alternative energy stoves, which sell for

an average of £400 EEE is not involved in installing either of these items Solar panels have historically

represented about 50% of the alternative energy products

Exhibit 5 is a letter from Jo Carey (EEE’s MD) to Sukanta Woolf (GJ partner) providing a brief commentary on

EEE’s financial statements which she has attached These statements are for the years ending 30 September

2006-2009 “from our first year of trading to our most recent full year’s results” It is therefore possible for

candidates to review EEE’s full financial history as part of their preparation Jo Carey also puts the UK recession

in perspective by stating “trading conditions were tough in 2009 and, although the cashflow in 2009 continued to

be strong, the profit after tax was not as high as in 2008” The issue of the importance of cash control and

profitability has had a direct impact on the shareholders “As a result, the dividend to shareholders was reduced

by £100,000”

Exhibit 6 provides 6 pages of management accounts and notes, for the 4 years to 30 September 2009 These

accounts (which are in line with the audited accounts) provide the following key information:

 EEE has achieved good revenue growth over the four years – up from £3,094k (2006); to £8,175k (2007) an

increase of 164%; to £13,082k (2008) an increase of 60%; to £15,134k (2009) an increase of 16% (The decrease in the rate of growth may be caused by the effect of the recession in 2009, may indicate that EEE’s market is tightening, or both)

 EEE’s gross margins on total revenues have changed over time: 50% (2006); 40% (2007); 30% (2008);

26% (2009) (This changing GP% needs further analysis by examining the detailed margins relating to the

various business activities)

 Overheads as a percentage of revenue have decreased steadily over time: 31.3% (2006); 20.1% (2007);

15.1% (2008); 15.1% (2009) (These changes show that EEE is controlling its overheads when compared

against revenues – however there has been an absolute increase of £1,316k over the four years – from

£968k(2006) to £2,284k (2009))

 Operating profit percentage undulated in the four years being: 13.7% (2006); 16.5% (2007); 12.0% (2008);

8.9% (2009) (It would appear that the best year was the second year of operations – despite strong growth,

costs were well controlled – followed by a steady decline as costs have risen)

 Dividends paid have varied over time but after the first year have been very strong: £50k (2006); £400k

(2007); £600k (2008); £500k (2009) (The decline in 2009 has already been emphasized by Jo Carey and is

an indication that the directors, who are receiving the dividends, must all be aware of the changes in EEE’s cash and profit situation)

 The balance sheet shows that EEE is a company with a fairly normal mixture of non-current and current assets and some current liabilities, but with no long-term debt at this time Since the opening year it has had

a strongly increasing working capital and total net assets position (The main noteworthy points are (i) a

steady increase in current assets since 2006 notably in accounts receivable – in line with revenues (ii)a good cash position (iii) inventories appear low/well controlled and (iv) current liabilities have not increased significantly over time All of these are signs of good financial management in EEE)

 The cash flow statement shows how the annual cash generated has been spent and shows positive cash inflows for each year: £25k (2006); £310k (2007); £138k (2008); £318k (2009) resulting in a substantial final

cash balance of £791k (Apart from the purchase of non-current assets, the main cash outflows from the

cash generated from operations have been the dividends paid totalling £1,550k)

 From the Notes to the accounts concerning Revenue, and Cost of sales the detailed trends in revenue

streams and the comparative margins can be analysed (Over the years 2006-2009 revenue from

commission rose significantly for the first 3 years but has fallen back in 2009 indicating that this income might have peaked Revenue from installation work has been rising in all four years but the rate of increase has declined in 2009 – further evidence that the market for insulation installation is tightening Revenue from AEPs – particularly solar panels – has grown exponentially from £112k (2006) to £1,995k (2009) The margins on commissions are: 76% (2006); 90% (2007); 90% (2008); 90% (2009) Margins on installations are 34% (2006); 11% (2007); 7% (2008); 6% (2009) It is also clear that these two revenue streams are dependent on each other and analysing these business activities together may be appropriate The margins

on AEPs are 50% (2006); 50% (2007); 50% (2008); 54% (2009) – which means margins are

holding/increasing in an expanding market – a very good sign) Revenue trends and the margins must be fully analysed to understand what is happening to EEE’s business and its life-cycle

(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 picture of the business)

Exhibit 7 is an email from Bernie Zhang which explains in more detail how the call centre has operated since

the business started; how the installation market has been calculated and what has been the EEE success rate

and flow of customers signing contracts It also refers to This is important information giving a clear indication of

the success rate (an average of 1 in 5 in the four years of business) in calling customers, some of the reasons for that success rate (rate of subsidy; use of local residents in the EEE call centre) and of the strong margins from this business activity

Exhibit 8 is an attachment to the previous exhibit which provides tabular numerical information concerning

EEE’s operational activities of signed contracts and installations completed, together with other information

which allows the EEE market for this work to be determined From this information the total potential market can

be calculated as being 60,000 households which means that EEE has probably only one or two years work remaining on this project Candidates would have been well advised to have calculated this total figure and arrived at their own conclusions concerning the EEE business activity position [Despite its brevity this is a key exhibit]

Exhibit 9 is an email from Len Wozniak which provides important information on the development of the

insulation installation operations It explains that because of the time taken to complete an installation job, including paperwork, EEE’s initial team of installers had to be augmented by using subcontractors to cope with the schedule of work This posed additional/unforeseen problems for EEE’s operations in terms of quality and nature of work done: subcontractors work to different operational standards; there was an increased need for more supervision of subcontractors’ work; there was an increase in the amount of remedial work necessary – which was carried out by supervisors – because of customer dissatisfaction with subcontractors’ work; there was an increase in materials used These factors meant that EEE ended up training its own installers and then

promoting them to be supervisors looking after subcontractors Inevitably these key factors and their impact on

efficiency and the quality of work delivered have changed EEE’s operations and have had an impact on

profitability

Exhibit 10 provides the financial data for job costs (i) using own labour (ii) using subcontractors, for the years

2006-2009 This shows the large difference in costs between using subcontractors versus using own labour

The subcontractors’ costs per job are much higher (more than 40% each year) and the effect of this difference is

to reduce profitability on the installation work – because it is virtually ‘fixed price’ work – bringing that profitability down to very marginal levels Using the average revenue figure of £600 and the 2009 information this was just

£22 per installation using subcontractors, versus £207 for a job done using own labour

Exhibits 11 a, b & c are a series of articles (i) from a website identifying some of the arguments for and against

the Kyoto accord; (ii) from UK government information (March 2010) outlining the incentives to become energy efficient customers; (iii) an explanation of how the Feed in Tariff (FIT) works from the Energy Saving Trust UK All of these articles indicate that government incentives will be available from 1 April 2010 to encourage and

enable customers to make energy savings and earn long-term government subsidies (The government

announcement is extremely timely, and the fact that the incentives focus on subsidies for the installation of solar panels means that it is particularly relevant for EEE – despite the fact that its current business activity is only focussed on the supply of solar panels)

Exhibit 12 consists of an article in the Housing Investor Chronicle giving a positive review of the UK

government FIT proposal As well as identifying the potential return on the £10,000 - £12,500 investment that might apply (7-10% tax free), the article also identifies the fact that the UK energy regulator is predicting a 20% power price increase by the year 2020 – which should act as an additional incentive for households to install solar panels The article also identifies the fact that investors and banks will see the benefit of the scheme, and

as a result specialist loans or top up mortgages will become available to those who want to install such a

system (This article reinforces the good news concerning the government incentives but it is also identifying

one or two of the potential difficulties with the scheme)

Exhibit 13 is an email from Jo Carey concerning EEE future plans and opportunities in the UK and abroad Her

strategic review considers the future for EEE in seizing the opportunity to develop its revenues from alternative energy products and in particular solar panels and possibly solar panel installation She identifies the need (and the problems) associated with being a qualified accredited installer She also identifies the effect of the recent increase in demand for solar panels which has pushed up the cost of purchasing them from normal UK

suppliers and meant that EEE is now purchasing solar panels directly from Asian suppliers in order to maintain profit margins Jo Carey's review also considers the current UK business with AEPS and identifies the fact that the 1 in 5 success rate on UK insulation installation contracts is the maximum and that no further UK work is likely to emerge However she does identify that there may be some future work with another GPS company

overseas which would enable EEE to transfer its expertise from the current project into a new location (This is

an important email which identifies the possible strategic direction for EEE both positively in terms of new projects and new directions and negatively in terms some of the limits in its current installation operations)

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

 The first article describes the fact that, because of the government solar energy subsidy scheme, new types

of business being created described as “solar power farms” – meaning the larger-scale production of energy from solar panels covering large areas of land These can be viewed as either positive or negative

developments depending on their energy saving potential versus their other impacts on the environment

(The article also identifies the expected surge in demand and installation as expected to be 500% – but gives no measurable starting point or other objective yardstick against which to measure this claim)

 The second article describes the problems relating to insulation installation concerning the quality of work – particularly of subcontractors – and the quality of materials used It focuses on the difficulties which

householders have in seeking redress (This article serves to confirm the problem experienced by EEE of

identifying good quality efficient subcontractors)

 The third article looks at the issue of “sunspot” activity and the detrimental effect that a major increase in this activity could have on electrical systems worldwide

 The final exhibit has three short articles dealing with: (i) the dangers of poor quality loft insulation work by subcontractors causing house fires; (ii) the issue of the theft of paintings from a loft by an insulation

subcontractor (again!); (iii) the rising cost and questionable quality of solar panel installation (These articles

emphasise the problems of using subcontractors in installation work and the increasingly variable quality of solar panels)

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 from Sukanta Woolf, partner in Gunter Jensen LLP in charge of EEE work, dated 3

November 2010, to Adie Maynard subject: Report for EEE board

 Exhibit 16 – email from Jo Carey, managing director of EEE, dated 2 November 2010, to Sukanta Woolf

subject: EEE results to 30 September 2010 and future opportunities

 Exhibit 17 – EEE management accounts for the year ended 30 September 2010 (4 pages)

 Exhibit 18 – email from Dany Parker, finance director of EEE, dated 1 November 2010, to Jo Carey subject:

Review of GPS proposal for EEE and other future opportunities

 Exhibit 19 – email from Len Wozniak, business operations director of EEE, dated 30 October 2010, to Jo

Carey subject: EEE’s solar panel business

 Exhibit 20 – recent news articles relating to solar panels and energy generation

Examination requirements

You were required by Sukanta Woolf to prepare a draft report to the Board of EEE dealing with following:

1 A review of EEE’s management accounts for the year to 30 September 2010 so that the members of the

board understand the company’s financial performance

You should cover revenue, gross profit and operating profit, evaluating these figures against the actual results for the year to 30 September 2009 You should discuss the results for each of the business activities and also comment on the cash flow statement

2 An analysis of Dany Parker’s proposal for the board to consider expanding into Victoria state in Australia, where there is an opportunity for EEE to repeat its UK success

In your analysis, you should include a calculation of the project’s profitability for the total 5-year period and comments on the assumptions made by EEE You should prepare a sensitivity analysis evaluating the effect

of a change in the estimated success rate on calls being converted to contracts You should also consider the opportunities for, and threats to, EEE of this proposed expansion into Australia, including movements in the Aus $:£ exchange rate

3 An assessment of the economic benefits and risks relating to EEE’s proposed strategy to develop its business from solar panel sales and solar panel installation in the UK

Your assessment should consider how EEE might deal with these risks, and]also address Jo Carey’s and Len Wozniak’s concerns over, and the ethical issues relating to, the development of EEE’s solar panel

business

On the instruction page you are told 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 four pages of financial information provided in Exhibit 17

Using the new financial information it would then be essential to assess the 2010 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 costs including a discussion of EEE’s business activities as well as a commentary on the cash flow statement Similarly evaluating the proposal for a possible expansion

into Victoria state in Australia requires a careful detailed reading of the information given in Exhibit 18 and

remembering that similar information had been provided in the Advance Information before tackling this

straightforward requirement to calculate and assess the possible total 5-year profit However considering

sensitivity and the opportunities for, and threats to EEE of this project required a more developed response The third requirement requires an assessment of economic benefits and risks relating to EEE’s proposed strategy to develop its solar panel business, together with addressing the directors’ ethical concerns With good 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 her email Jo Carey (JC) requests an analysis of the income and cash flow statements

(meaning both the 2010 Income Statement and 2010 Cash Flow Statement) Separately she requests a review of the Global Power Supply (GPS) proposal for a project in Victoria, Australia stating “we would like

an overall calculation of the project’s profitability for the total 5-year period, together with your consideration

of our assumptions for this project” She outlines some of the details of the project stating that it is an

“interesting opportunity” and identifies similarities with the market in East Anglia and provides a reminder that two of the EEE board have past experience in Australia She raises the additional question of whether EEE should “expand significantly its solar panel business” and refers to Len Wozniak’s concerns as well as mentioning some of her own JC identifies the risks that EEE might be tarnished by the general concerns surrounding solar panel supply and power generation and requests that GJ provide their professional views

on how EEE might address this “public scepticism” (Exhibit 19)

(This is an exhibit which affects all requirements, but the main requests are fully interpreted by Sukanta

Woolf (in Exhibit 15) enabling candidates to work through the information provided in answering the case

Although none of the requests require complex calculations the requests for “analysis”, “reviews”, and

“professional views” are intended to elicit appropriately developed written analytical responses)

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

September 2010: 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 main business activities; similar details covering cost of sales; a schedule of overheads/administrative expenses; and details of the non-current assets for tangible assets The 2010 set of accounts are presented in a similar

format to the 2009 information presented in the AI (Exhibit 6) and should have posed no problem for any

candidate to assimilate (This would 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 2010 should have been anticipated and detailed analysis on AI figures was essential preparatory work)

 Exhibit 18 This email from Dany Parker to Jo Carey provides the detailed numerical estimates and

assumptions relating to EEE’s project in Victoria The numerical information is presented in a similar format

to the information shown in the AI (Exhibit 8) and should have meant that candidates would recognise both

the 5-year contract and work profile and the types of parameters affecting the market predictions The information relating to revenues and costs for this project was also similar and for some of the numbers

identical – apart from the currency – to the information in the AI (This exhibit which related specifically to

Requirement 2 should have been very easy to comprehend and assimilate, although it was not necessarily predictable Provided that candidates had done their preparatory work and made a point of understanding each exhibit in the AI then working through this particular exhibit would have been straightforward However care was necessary because the information was presented in two currencies and also because this exhibit contained the same numbers as had been presented in the AI – as a result there was a risk that candidates would erroneously accept those numbers without questioning them The fact that Requirement 2 requested

a sensitivity analysis should have alerted candidates to question the numbers and the assumptions

underpinning the numerical information and that there was a need for professional scepticism concerning the information supplied and care would be needed in any commentary)

 Exhibit 19 The email from Len Wozniak identifies a number of critical matters affecting the speed of the

development of the solar panel business The list provided identifies four main political and economic concerns which surround the FIT policy The final two paragraphs raise the issue of the sourcing of solar panels from abroad and the potential business development which could result from a link-up with a “solar

power generating company” (SPGC) (This email builds on parallel AI information and news articles

concerning the quality of work of insulation subcontractors which had provided some background context to

an industry which has some unscrupulous operators with doubtful practices The list provided is a summary

of the general questions being raised in many newspapers concerning the future of the UK government’s FIT policy, and should have acted as a reminder to candidates of other similar issues which have appeared

in the news and which they might have considered in their general PEST/ PESTLE or SWOT analysis In addition to the obvious points being raised by this exhibit there is a subtle ethical conflict in the last

sentence of this email which suggests that a link with an SPGC operation might be successful and profitable

particularly if targeted at “lower income households” – which should have raised concerns about exploiting the vulnerability of such potential customers )

 Exhibit 20 This exhibit comprises two newspaper articles concerning different aspect of solar panels and

energy generation The first article is in a “trade” journal and describes the increasing public concern over the accuracy of the energy and cost savings claims made by installing solar panels together with other concerns over the energy conversion capability and long-term quality of imported solar panels This article also refers to other negative publicity concerning the qualifications of solar panel installers and the quality of their work The second article is from a national newspaper reporting on the topical “rent-a-roof” scheme

which in itself provides some fairly generous (and presumably hard to verify) figures concerning the benefits

and costs of having panels installed in this way However the article does mention a number of the risks

regarding this scheme over the longer term (This exhibit identifies different problems and concerns which

already exist within and around the solar panel industry in general and – given its infancy – it would be hard not to conclude that the industry will continue to generate its problems No mention is made of EEE in these articles so the problems, although quite precisely defined, are not fully aimed at EEE – but there are clearly

ethical points to be considered and addressed by any business in this industry)

The information provided in the Exam Paper (EP) develops a number of previously established factors for EEE’s business all of which require different analytical techniques to be used in order to provide business advice to the

board The financial information provided to 30 September 2010 requires a clear focus on financial statement

analysis – a basic professional skill and one which candidates must demonstrate The analysis of the estimates

for the project in Australia requires structured financial data and information analysis together with a broader,

professionally sceptical, review of both the information supplied and this particular business activity in the form

of both sensitivity and partial SWOT analysis The other information provides the basis for consideration of the issues affecting a future solar panel strategy whilst also focusing attention on the broader public concerns

affecting this particular business activity The specific strategic analysis requested requires a partial PEST or

PESTLE and SWOT analysis of this business activity together with a sceptical and ethical review of these

issues The individual requirements clearly describe the route which should be followed in developing the report

For Requirement 1 the financial statement analysis of EEE’s management accounts for the year to 30

September 2010 had to be focused on specific key features For the 12 months income statement the analysis should be of revenues, gross profit both in total and for each business activity, as well as operating profit

evaluating these figures against the 2009 results Candidates were also requested to comment on the cash flow statement The first part of this financial statement analysis – that is concentrating on the income statement and business activities – should have been a speedy exercise numerically, which then had to be developed with a clear commentary based on the numerical analysis It should then have been augmented by a comment on the cash flow statement

Requirement 2 requires some basic financial data analysis to calculate the profitability for the total 5-year

project, together with a comment on the assumptions made by EEE Given that the information provided is a series of estimates, this would require a detailed review of all financial assumptions with some appropriate professional scepticism directed at each assumption made Specifically candidates have to perform a sensitivity analysis of the success rate on calls and consider the impact of movements in Aus $:£ exchange rate as well as consider the opportunities and threats from this “expansion” This calculation, evaluation, flexing and

consideration of some of the wider issues should have been a reasonably logical and straightforward process The evaluation of this “expansion” would also follow on quite naturally from a correct analysis of the 2010

financial results

Requirement 3 requires a strategic analysis of EEE’s solar panel business and the prospect of expanding that business activity in terms of solar panel sales and solar panel installation in the UK The requirement builds on the scenario presented in the AI and is accentuated by the analysis in Requirement 1 There is also the need to

address the specific concerns raised by Jo Carey in her email (Exhibit 16) and by Len Wozniak in his email (Exhibit 19) as well as a need to review and comment on the solar panel issues identified in (Exhibit 20) In

addition there are the other current economic issues which might have been identified independently by

candidates which would have augmented the qualitative review and commentary required An important

element of this requirement is to maintain a balanced approach in terms of economic benefits and risks and any ethical issues identified These three EP exhibits provide different examples of business concerns some of which are beyond the control of the company and some of which can be addressed and managed by EEE Candidates had to identify all issues, integrate AI and EP and evaluate EEE’s strategy

Summary of grades available

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

 Executive summary

 Review of EEE’s 2010 financial performance

 Proposal to expand into Australia

 Strategy for increasing revenue from solar panels

 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 Conclusions & 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:

The total number of boxes for each topic and skill was as follows:

This reflects (i) an even balance between the three main requirements and (ii) a greater and equal weighting of

SP&S and AJ, both of which were indicated to candidates in the rubric to the Exam Paper

PART 3: COMMENTARY ON CANDIDATES’ PERFORMANCE

Professional skills

Assimilating and using information

In each requirement candidates had to make extensive use of the Advance Information as well as using the information in the Exam Paper to assimilate and organise material in order to build their answers In the majority

of scripts, candidates demonstrated good assimilation and use of information in each requirement The advance case material provided a substantial amount of background information relating to EEE’s relatively short (4-year) business history and its financial results Information was also provided about recent market developments, a summary of relevant government policy and elements of EEE’s strategic plans There was clear evidence that most candidates had fully assimilated the fact that EEE was in a business with distinct business streams: commissions and installation work relating to loft insulation – which was nearing the saturation point of its identifiable market working with AEPS in the East of England – and sales of alternative energy products which were burgeoning because of the public’s awareness concerning energy issues and increasing individual

demand for a solution Because of the topicality of the case, it was expected that candidates would keep up to date with any changes in government policies on insulation and solar panel energy subsidies, particularly following the UK elections and the timing of the new government’s review of economic policy, in the run-up to the exam The situation as presented in the AI indicated that the business would have to make some strategic changes to continue its previous success and some possible new business options overseas were suggested For Requirement 1 candidates should have prepared for the exam by analysing the historical trends (2006-2009 inclusive) in revenues; gross profit and operating profit and should have identified what was happening to each

of the main business activities: commissions earned and call centre costs; installation of insulation using own labour or sub-contractors; and alternative energy revenue streams and costs Following on from how candidates read the business information, they could have identified that EEE comprised two or three main business activities, depending on whether they viewed the business activity of earning commissions as being inherently linked with the installation activity or separate from it In terms of the way the business activities are described and assessed by EEE the two activities are evaluated separately, but it is also clear that they are linked together because neither activity could exist on its own It was also important that candidates should have identified that EEE was a successful business from its inception but that its original core activity of loft insulation had a finite business life, because of market saturation, which by September 2009 was already nearing its end Candidates should also have identified that revenues from the Alternative Energy Products (AEP) had been growing over time and that the margins associated with these products were high The new government incentive for

households to install solar panels – which was available from 1 April 2010 – was a timely boost for the AEP side

of the business If the preparatory assimilation had been properly conducted then it would have been

straightforward for candidates to understand, assimilate and use the new information presented in the Exam Paper, concerning the 2010 financial results, and they would have fully prepared to tackle the required financial statement analysis

For Requirement 2 the AI had material which provided information on the insulation installation business in a parallel form to the details which were subsequently to be provided in the EP – although, of course, candidates

would not have known that The main parallel material was in Exhibit 8 which comprised the details of the

signed contracts and the installations completed for the AEPS customers/households This exhibit also provided details of the factors affecting EEE’s success rate in the potential regional market based on a structured

analysis of the type of property, its construction history and the nature of household and property occupancy From that information two important facts could be established: (i) the finite element of EEE’s UK installation work could be determined indicating that the installation project was coming to an end and (ii) the maximum (1

in 5 of AEPS customers) success rate in the market in the East of England In Exhibits 9 there was information

concerning the problematic use of subcontractors, but that volumes of activity meant that sub-contractors were

an essential feature of EEE’s business In Exhibit 10 there was financial data which showed that using

subcontractors was less profitable than using own labour for installation work From the EP the key facts to assimilate were that the project in Australia was similar in nature and scope to the UK installation project – the main facts were presented in an almost identical way – but that EEE was making estimates concerning local success rates and various costs associated with that work Provided that candidates had assimilated all the exhibits from the AI then the information presented in the EP should have posed no problem for any candidate

at this level

For Requirement 3 most candidates had studied and reviewed all the exhibits in the AI and had used the

information provided in various places throughout the A I to perform a detailed PEST/PESTLE and SWOT strategic review of EEE and its business As a result the majority were well prepared for a broad strategic

analysis requirement The EP provided additional information identifying concerns from Jo Carey (Exhibit 16)

and Len Wozniak (Exhibit 19) concerning the public’s concern over solar panel supplies, panel energy outputs and issues surrounding the solar panel installation business The two newspaper articles in Exhibit 20 were

both linked to this subject and identified other issues and developments in this area of work All of this EP

information was fairly straightforward and built on both the AI material as well the analysis of the solar panel sales trends identified in Requirement 1 Because the surge in solar panel work is affected by the UK

Government’s subsidy policy and is dependent on continuing support, candidates were asked to consider the broader economic perspective for this area of work as part of their strategic analysis of benefits and risks

Candidates were also asked to address the directors’ concerns over the ethical issues relating to the

development of EEE’s solar panel business Stronger candidates had a clear understanding of what was

required and could address these concerns but weaker candidates appeared to be less well prepared and less able to analyse the specific benefits and risks of a strategy to develop solar panel sales and installations in the

UK as well as identify the ethical issues This inability by weaker candidates to answer this type of requirement raises the concern over how well some candidates can assimilate new information presented in the EP and are able to deal with questions which require the new issues presented in the exam to be part of the answer

Structuring problems and solutions

The majority of candidates demonstrated good skills in structuring problems and solutions For Requirement 1 most candidates performed the appropriate quality analysis on the 2010 financial statements both in the report and in their appendices by following the structure requested in the EP and integrating it with their preparatory analysis However because the requirement was predictable and because none of the numbers required any adjustment before the financial analysis was conducted, many candidates found this section to be straight forward and just wrote a long analysis which frequently read as a bland section of their report rather than being focussed

at the correct level of precision On the positive side some very good grades were awarded under this heading in Requirement 1 However a continuing weakness for many candidates and the weaker ones in particular is the issue of the failure to analyse and present both absolute figures as well as percentage changes in their report – thus rendering their work almost meaningless at times because it had no anchoring context, and frequently no

indication of the direction of change: “the overall gross profit percentage for 2010 has changed by 7.1% from

2009” In other instances, candidates decided to make as much use as they could of their prior preparation and

wrote out partial reviews of prior years rather than just a comparison with 2009 – it was unnecessary and consuming work that was not required Inevitably many weaker candidates performed some standard numerical financial analysis but then provided a very poor analytical commentary on that work This was particularly so on the analysis of the cash flow statement which was by far the weakest area of analysis and produced many

time-mundane and frequently useless comments such as: “EEE’s cash balance has increased significantly - by 109%”

These candidates do not appear to appreciate that a cashflow statement is an analysis of the movement in the cash balance during the year that requires interpretation, rather than further ratio analysis

In answering Requirement 2 most candidates calculated the potential revenue and costs for the proposed

expansion into Australia as requested and provided an overall calculation of the project’s profitability for the total 5-year period but a significant number merely calculated these figures for each year (without an overall total) Many of these then performed an additional project appraisal calculation (such as NPV) which was not required, for which they were not provided with the relevant discount factor, and for which no credit was awarded Strong candidates performed a clear sensitivity analysis by looking at success rates and making a logical decision as to which direction the sensitivity analysis should move These candidates also conducted a similar exercise for possible Aus $:£ exchange rate movements providing an answer based on absolute changes Weaker

candidates failed to provide any sensitivity analysis or else provided a sensitivity percentage change for both success rates and exchange rate movements – which is not particularly helpful without some further context Strong candidates reviewed all costs for relevance and used good professional scepticism to comment on the assumptions provided Weaker candidates simply accepted the numbers (or percentages) as given without any commentary

For Requirement 3 good candidates used relevant parts of their previously prepared PEST/PESTLE and SWOT analysis, taken from the AI and augmented by external research, and tied that pre-prepared material in with the information provided in the EP to provide an analysis of the economic benefits and risks relating to EEE’s future solar panel business activity Good candidates also made their analysis of ethical issues encompass the

concerns of the two directors as well as focussing on the relevant concerns of the public which EEE needed to address Weaker candidates provided a limited range of “economic” analysis – frequently only focussing narrowly

on solar panel profitability rather than the external factors which an economic review indicated Many weaker students did not really address any ethical dimensions in their strategic analysis and made few comments on these issues

Overall candidates demonstrated that they could structure problems and provide solutions with competence

Applying judgement

Strong candidates made logical and appropriate judgements built on the analysis which they had conducted For Requirement 1 these candidates demonstrated that they had the ability to make the links between the current successful position of EEE in its timeframe – within its potential life-cycle of 5 or 6 years for loft

insulation – and the broader economic arena, together with the need to achieve future success for EEE Their judgements came from their analysis of EEE’s financial results and demonstrated a logical flow by reviewing the implications of their analysis for each of the key areas of business activity

Good candidates also demonstrated the necessary level of balance in their judgement This could be seen in Requirement 2, when forming a judgement meant balancing the opportunities and threats of the proposal to expand into Australia in a way which would have assisted the EEE board in its decision making

Good candidates’ ethical judgement manifested itself in Requirement 3 with judgements that covered both a range of relevant areas such as the poor quality of imported panels and solar panel energy performance as well

as a depth of discussion about reasons why these items created problems and how these issues currently affect EEE Similarly an appropriate range and depth of discussion and judgement was applied to the ‘Solar Power Generating Companies’ and the potential for aggressive selling and possible reputational damage for EEE in any association with these types of organisations

In this case study, as in most case study exams, a weakness in applying judgement throughout the report can

be positively correlated with a failure overall Weaker candidates did not demonstrate that they had applied any obvious judgement in their answers and in most answers weaker candidates failed to state any judgement at all Some of the judgements provided did not follow from the analysis and there were frequent examples of poor judgement with little logic Many offered no balance at all in their reports simply advocating either the

opportunities or the benefits of a course of action Most importantly their judgement in the area of ethics was often non-existent with weaker candidates simply accepting what had been reported publically without

considering the impact on EEE or how to mitigate these potential problems – a complete absence of good professional skill in this area

Conclusions and Recommendations

Strong candidates provided appropriate, clear conclusions throughout their reports which followed on from the analysis and judgement in their scripts – this was particularly relevant in Requirement 1 They also provided overall conclusions which integrated their reports in their executive summaries These good candidates also provided sound, worthwhile, commercial recommendations, where appropriate to the requirement This included

specific recommendations for Requirement 2 such as the need to “review all assumptions concerning revenues

including whether better rates can be negotiated with GPS” and for Requirement 3 appropriate

recommendations to mitigate the problems identified in their analysis such as that “EEE should review all solar

panel advertising material to ensure that it is not misleading or open to misinterpretation by potential

customers”

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 – “EEE should send all of

its imported solar panels back to Vietnam”” – being one such suggestion which demonstrated no commercial

understanding of the global business environment in which EEE operates

Executive summary

As usual in the successful scripts, candidates provided logical executive summaries appropriately aimed at the correct audience – the EEE board Good executive summaries contained numerical and written extracts of information from the appropriate analysis under the various sections of the report (and the relevant appendices) and, together with the essential points from judgements made in the main body of the report, went on to provide clear conclusions and recommendations for their readers In addition these executive summaries were concise without being too short – depending on the size of writing this tended to be between 4-6 sides

The main problem which affected weaker candidates specifically in this section was poor planning and time management Many weaker candidates had clearly not planned their work or left enough time to complete the executive summary and as a result they inevitably made a scrambled, unsatisfactory or incomplete attempt at it For those who managed to write an executive summary but did not achieve competent grades, this was

frequently because they failed to present the relevant facts and often any key figures from their report, provided little or no judgement, omitted conclusions and recommendations, or else provided conclusions that did not appear in the body of the report and recommendations that were inappropriate Some of this was simply due to the poor report writing technique of not bringing appropriate facts forward from the main body of the report into the executive summary However it was also due to summarising a weak or unbalanced report which inevitably only leads to a weak or unbalanced executive summary,

A small minority of students wrote executive summaries which showed a lack of diplomacy – such as referring

to EEE directors by their first names – but a number also made inappropriate and mundane statements and

recommendations to the IAJ board such as “EEE needs to find a new stream of income in the near future” or that “EEE has built up a cash mountain which is available for spending” These remarks displayed both a nạve

level of generality and a statement of the obvious, demonstrating a complete misunderstanding of what this report was supposed to be offering to the board of EEE No board would be prepared to accept such poor quality advice and candidates who write such statements in their reports find that their efforts are not acceptable either

Requirement 1: Review of EEE’s 2010 financial performance

This financial statement analysis requirement was well answered by the vast majority of candidates 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 Inevitably with a requirement for which candidates have to preparing an appendix, there is always the risk that they will spend too much time on both the calculations and report writing for this section When this happens, the result is an imbalanced script and candidates face the prospect of producing one or more insufficiently competent sections later in their report (Requirement 3 or the Executive Summary) as time runs out This is a particular problem for weaker candidates who are producing scripts of marginal quality in Requirement 1 and taking too long to do that Candidates must pay attention to the

instruction on page 1 of the exam paper that the report should be balanced across each of the three detailed

requirements (and candidates should not forget that there is also a need to produce an Executive Summary for

their report – which takes time.)

The requirement to analyse EEE’s actual results for the year to 30 September 2010 was well anticipated and most candidates were properly prepared – by having analysed EEE’s previous financial statements in the AI

(Exhibit 6) – and followed the instructions provided The required analysis was clearly defined: a review of

revenue; gross profit and operating profit evaluating these figures against the actual results for 30 September

2009 Candidates were also required to discuss the results for each of the business activities and comment on

the cash flow statement [emphasis added] The main analysis was therefore of EEE’s performance for the year

2010 which necessitated analysing the trends for the business activities and identifying, with reasons, what

were the successful and the less successful areas of the business It also required an analysis of the cash flow

statement (see comment below)

This requirement produced competent grades (SC or CC) in the vast majority of scripts, in which appropriate detailed analysis of EEE’s overall results and each of its business activities together with good explanations, commentary and judgement, led to relevant conclusions In many cases, this review work was appropriately linked to external events such as the increase in public awareness of the impact on the environment of

emissions, the need to economise in times of rising utility costs and the government incentives, which may increase or disappear completely, which could help or hinder EEE’s business activities

There were, as usual, some weaker candidates who made poor attempts at analysis and provided weak

commentaries on the EEE financial information Low calibre financial statement analysis for this requirement is closely correlated with an overall fail in the case study Given the fact that the majority of candidates did well in this section the critical points which follow must be read with those successes in mind

One of the biggest weaknesses in the financial analysis of the income statement is that a significant number of candidates only provided calculations of percentages and percentage changes without any absolute figures and absolute changes from one year to another At one end of the spectrum such analysis might appear as mildly

imprecise, but at the other end it results in no real information being communicated at all “The 16% fall in gross

profit is significantly less than the 34% fall in revenue” Anyone reading a report without absolute numbers in it

would struggle to understand the relative importance of anything being analysed, especially as many of the candidates who calculate percentages believe that the numbers speak for themselves – which they certainly do not It is important for all candidates to be aware that it is the explanation which accompanies their numerical analysis which determines the level of competence they are awarded On occasions candidates only looked at total and business activity revenue streams and provided no commentary on the comparative profitability of the activity Despite clear instructions, in the requirement a small number of candidates provided additional detailed analysis of other years This work, which was evidently pre-prepared, wasted their exam time and earned no marks

Within this requirement it was the request to comment on the cash flow statement (CFS) which proved to be the most poorly answered part of the financial statement analysis It proved to be a challenge for too many to produce something of value it was a real differentiator between strong and weak candidates , many of whom

could not provide a worthwhile comment concerning this statement and simply reiterated “that EEE had a

positive cash flow and a strong cash position”; this is hardly analysis at all Other candidates managed to go a

modest step further to provide analysis (without providing a number) such as the increase in EEE cash was

“caused by a reduction in dividends, but this reduction is a problem because it may discourage future investors”

thereby missing a number of key points about this owner-managed business and the information contained in

the CFS

Historically, before the CFS became the compulsory third financial document which a business had to produce, analysts would prepare their own CFS as the first step in analysing how well the business was being managed

It therefore needs to be understood by candidates that the CFS is already a reconciliation statement – it

identifies the movements between the opening cash position and the closing cash position – and it is those movements which requires explanation The CFS does not need be the subject of a series of further

comparative (or any) calculations As a result, statements such as “EEE has increased its cash reserves [sic] by

a decrease in receivables and inventories of 268% and 259% respectively” are viewed as woefully incompetent

by the examiners on many levels Importantly if these percentages (which appear somewhat similar) are to have any real meaning (which they do not have) they would have to be put in the context of the absolute amounts to which they relate (receivables £816k and inventories £164k) But crucially it is the absolute movement in those

figures which has to be explained The positive inflow of cash from receivables is as a result of the contraction

of the business: receivables have gone down because the reduction in business activity has meant lower levels

of invoicing to customers (AEPS in particular) and therefore the amounts outstanding have reduced as previous higher levels of receivables have been collected, resulting in a positive inflow to EEE of £305k – as shown in the CFS

In the year to 30 September 2010, EEE is an exception: a rare example of a business where the income

statement provides the more important story of the business contraction, which must be managed, as opposed

to the CFS story of the increase in the balance at the bank [Cash is not always “king” …]

Another point to be emphasised is that candidates who debate the “unreliability” of management accounts are continuing to misunderstand the nature of the financial information being provided in the case study Despite the fact that “no audit” has occurred, candidates must understand that no company would normally produce its own information for decision making purposes which is unreliable In addition, the reason for using “management accounts” rather than with the statutory accounts is so that more detailed information can be provided for analytical purposes

Despite these points, it is important to emphasise that the great majority of candidates achieved competent grades in Requirement 1and this has continued a long-term trend in the steady improvement of financial

statement analysis in the case study

Requirement 2: Proposal to expand into Australia

This straightforward requirement for financial data analysis was answered reasonably well by the majority of candidates The fact that the information provided in the EP was very similar to information provided in the AI meant that most candidates made a reasonable start on the calculations relating to the Australian proposal The major differentiator in this section related to the sensitivity analysis, and the logical way that candidates used their professional scepticism to comment on the assumptions being made These factors provided a real

differentiator between the strong and the weak candidates

Strong candidates made a sensible evaluation of the total market factors which had been identified in the e-mail from Dany Parker and arrived at the correct figure for EEE’s target market of 100,000 households This figure also corresponded to the total being suggested in the 5-year table of the contract/work profile By working with this round number, as the figure for potential households/customers, candidates had an easy series of

calculations to perform to arrive at an overall profit figure for the total five-year period A sensitivity calculation was then performed looking initially at the proposed success rate in Australia of 1 in 3 and comparing it with the maximum success rate achieved in the UK of 1 in 5 By flexing the calculation in this way and including all costs

in the evaluation of the proposal it could be seen that what was initially a profitable project became a making project The suggested exchange rate was also reviewed and the impact of any changes evaluated in terms of the project’s profitability Strong candidates then went on to evaluate each one of the assumptions made, by considering whether they appeared to be valid estimates derived from local Australian criteria or whether they were simply figures or percentages repeated from the UK experience These candidates identified

loss-a number of opportunities for EEE in this proposloss-al loss-as well loss-as the threloss-ats, loss-and suggested wloss-ays in which those threats might be mitigated They concluded their work in this section with appropriate conclusions on all aspects

of their calculation and made recommendations on the way in which the financial assessment and the project in Australia could be improved

Weaker candidates frequently failed to produce correct calculations in order to meet the exam requirement This included calculating the profit for each of the five years of the project but not identifying the 5-year total – a clear error Despite the simplicity of the numbers, weaker candidates also made errors on almost every line of their calculations; this should be the subject of real concern for candidates at this stage in the qualification process For the sensitivity calculation on the lower success rate, weaker candidates frequently chose a success rate which they did not, or could not justify As a result, the calculation – if any calculation was carried out at all – was difficult to understand In a number of cases, the Australian success rate was increased , an extremely unlikely scenario, and not the purpose of a sensitivity calculation Most weak candidates did not attempt any sensitivity analysis, or provide any comment, on the exchange rates Neither did they evaluate any of the assumptions made in the proposal – simply accepting everything that was written down in the EP They

therefore demonstrated very little professional scepticism concerning the assumptions Similarly they failed to identify the opportunities for EEE and, although they could identify some threats, it was rare that they made any suggestion as to how they might be overcome Their conclusions and recommendations were also weak One important aspect of this financial data analysis which affected too many candidates was the failure to exclude the “attributable” UK fixed costs of £1.3m per year from the assessment of the project Many candidates commented on the size of these fixed costs but only a relatively small percentage questioned whether they should be included in the project appraisal at all

The weaknesses should not have been in the calculations because the figures were not complex and similar information existed in the AI Instead answers to this requirement identified deficiencies in preparation (through incorrect calculations as a result of not knowing the case thoroughly) and the inability to perform any reflective thinking in the exam itself (sensitivity analysis and professional scepticism concerning assumptions) when provided with some financial data to work on Case study candidates, on the verge of qualifying as a Chartered Accountant, must be capable of demonstrating the ability to critically evaluate information provided in order to advise a client Stronger candidates did demonstrate this competence successfully, but weaker candidates did not: making basic errors and simply accepting the information provided

Requirement 3: Strategy for increasing revenue from solar panels

This required the selective use of PEST or PESTEL analysis, which would have been part of a candidate’s preparation, and the development of that analysis to address the economic benefits and risks to EEE’s

proposed strategy to develop its business from solar panel sales and solar panel installations in the UK

Candidates also had to address the directors’ concerns, including the ethical issues, relating to that solar panel business development

A majority of candidates presented good evidence of their ability to identify the economic benefits and risks which EEE would face For the benefits most strong candidates identified such factors as the impact of the UK Government’s FIT policy in increasing demand; the advent of new entrants which would also increase demand for solar panels such as “solar farms” and the “rent-a-roof” scheme Most also identified the risks as being changes to, or cancellation of, the FIT policy; the long life of the solar panel project causing warranty problems and the speed at which the solar panel market might grow (due to the high cost of purchasing and installing solar panels making the scheme only available to wealthier households or those who could access finance in these difficult economic times)

Strong candidates evaluated the impact of the benefits and risks on EEE’s strategy and provided suggestions for exploiting the benefits or attempting to overcome the risks; as a result these candidates demonstrated their competence in this section Weaker candidates only offered more general points, made fewer of them, but most importantly they tended not to offer any suggestions on how to develop the benefits or respond to the risks – a critical point of failure

As far as analysing, assessing and addressing the ethical concerns of the directors and the public, strong candidates identified the reasons for public concerns and how these might be addressed They also identified that although currently the concerns may not affect EEE specifically, they must still be considered and action

taken to prevent these issues becoming a problem “There is a strong risk that the quality issues noted in the

UK Constructor News in October 2010 may affect some of EEE’s customers … We recommend contacting those customers who are at risk, checking the potential problem and offering to rectify any matters discovered This would prevent reputational damage and the risk of increased costs in the future and, as a result, reduced profits for EEE” Weaker candidates failed to identify the ethical concerns as such, identifying them more

commonly as business risks and, if provided at all, only offering some rather depressing solutions “Solar panels

are being miss-sold as having higher savings capacity than is the case – this can be dealt with by taking out insurance to cover the risk”

Overall in this section, there was evidence that weaker candidates had a general difficulty in identifying the key factors to be addressed – this was particularly so with the factors included in the EP This is a serious problem; these weaker candidates do not demonstrate that they have the skill-set to identify and address the problems presented to them

There was evidence that weaker candidates failed to manage their time appropriately because their answers to this requirement were frequently very short and hastily written This is a serious error of planning and reduces significantly the likelihood of passing

Overall paper

The majority of candidates produced a well-structured document and also wrote sufficiently clearly and legibly Most candidates made good use of appendices, but as always some produced what appeared to be their own re-writes of previously prepared schedules Most scripts met the requirements and were appropriate for board use, but a significant minority made statements which added no value and which the board would not have considered appropriate for their use A number of scripts were weak as a result of not finishing Requirement 3 and/or the Executive Summary It is important to remember that in order to pass the Case Study candidates are expected to achieve a majority of competent grades across the paper – doing very well in one section will not

“carry” a candidate to an overall pass

EEE Answer Appendix 1 (Requirement 1)

Operating profit 888 1,351 (463) (34.3)8.9% both years, relatively higher overhead base in 2010

Total revenue absolute growth year on year (5,185) 2,052 Reduction in overall activity,installation project facing saturation

Total revenue % growth year on year (34.26%) 15.69%

From Note 1 revenue

Commissions from AEPS 1,354 2,504 (1,150) (45.9)Activity decreasing, success rate becoming harder

Installation projects 5,259 10,635 (5,376) (50.6)Installation projects decline as market dries up

Alternative energy products

Alternative energy stoves 826 910 (84) (9.2)Variable sales activity caused by "trendiness" of product

3,336