Case study july 2013 marks plan ICAEW

EXAMINERS’ COMMENTS AND MARK PLANContents Page Part 1: Executive summary Part 2: The Case Study examination Part 3: Commentary on candidates’ performance Requirement 2: Evaluation of

EXAMINERS’ COMMENTS AND MARK PLAN

Contents

Page Part 1: Executive summary

Part 2: The Case Study examination

Part 3: Commentary on candidates’ performance

Requirement 2: Evaluation of tender for Vynes Independent School (VIS) contract 13

Requirement 3: Discussion of response to Humbells Hardware (HH) issues 14

Part 4: Appendices

Appendix 1a: Financial statement analysis: Review of TN business unit 16

Appendix 2: Financial data analysis: Calculation of revenue / gross profit from VIS contract 17

Part 5: Marking key

PART 1: EXECUTIVE SUMMARY

Introduction

This report covers the July 2013 Case Study (CS) exam It is issued in conjunction with two illustrative

scripts and related Examiners’ commentaries The first script was well within the top 25% of all assessed

scripts; the second failed the exam In reviewing these documents, it is important to be aware that it is rare

for a script to be uniformly ‘bad’ or uniformly ‘good’: a successful script will often present detailed coverage

of all requirements but include errors of calculation, spelling or logic; an unsuccessful script may contain

one or two strong sections or several excellent points but be let down by poor or incomplete text elsewhere

Attached to this report are two 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 into this area

Overview of performance

75.4% of all candidates sitting the paper passed, compared with 74.1% in both July and November 2012 As always, successful candidates demonstrated their higher skills and used their four hours effectively so as to

be able to cover all key aspects of the exam They approached the tasks methodically and produced

well-balanced, relevant answers addressing the principal components of each requirement; clear appendices;

and succinct, focused executive summaries They followed a clear progression from Assimilating and Using Information to the other three skills areas Many had an even spread of passing grades, revealing an ability

to assimilate the case material into a report together with commercial knowhow and appropriate professional scepticism They had clearly prepared well for the exam, making the necessary effort to master the Advance Information and to refine their exam technique

The subject of the case is Palate Ltd (LL), a privately-owned, top-end contract catering company based just outside London, with annual revenue of around £21 million, spread fairly evenly across its three divisions:

XX (Business & Industry), TN (Events) and LA (Schools) The candidate is in the role of Ashley Franklin, a

final-year trainee ICAEW Chartered Accountant working for Palate and reporting to the Director of Finance and Business Development, Samantha James

The exam requirements followed on from the Advance Information (AI) They comprised:

1 A review of the results of TopNotch (TN) business unit, and the results of one client, Hertfordshire Late Spring Fair (HLSF), for the year ended 31 May 2013

2 An evaluation as to whether Palate should tender for the catering contract of a new school, Vynes

Independent School (VIS)

3 A discussion of the steps to be taken to address the issues raised by a firm of external catering

consultants (Ogilvie) in relation to Palate’s client, Humbells Hardware (HH)

In the rubric, candidates were specifically told to provide an executive summary and that the report should

be balanced between the three elements There was in effect one requirement per business unit As always, each contained several parts: candidates had to identify these and then tackle them in an orderly manner:

 At Requirement 1, the tasks to be performed by candidates (including adjustment of numbers to create a comparable set of figures and the need to review HLSF on a stand-alone basis) were clearly set out

 At Requirement 2, they had to perform calculations, assess assumptions and advise on practicalities

 At Requirement 3, they had to address Ogilvie’s issues, deal with ethical aspects and wider implications

As always, the three main elements of the report were equal in importance: a candidate spending too

much time on any one section was likely to have missed the opportunity to gain passing grades in others

Candidates who failed did so for various reasons, including (as often) poor time management, which led

to unbalanced answers (incomplete Requirement 3; rushed executive summary) They would have

benefited from planning at the outset how best to structure each section (including all the components of

Appendix 1), rather than diving headlong into their report However, the key reasons for failure at this sitting were twofold:

 a continuing inability to apply professional scepticism (and perhaps to recognise where to apply it),

leading to poor grades at the related Applying Judgement (AJ) boxes in Requirements 2 and 3;

 weak recommendations in all three requirements

Requirement 1 was “conventional” (as one tutor put it) in testing financial statement analysis skills Where

it differed from some recent exams (“innovative” – same tutor) was that it focused on a single business unit rather than on the company as a whole, as well as requiring students to extract the results of one contract

which seemed to be distorting the figures and then to review separately the performance on this contract

Most candidates performed the requisite adjustments correctly, analysed the revised figures under the

headings given (revenue, cost of sales and gross profit) to ensure coverage of all the main elements,

developed this analysis with additional calculations (making use of visitor numbers) and evaluated their

findings appropriately For HLSF (mentioned only briefly in the AI), the initial analysis was good but only the best students evaluated it well The art here was to replicate the principles used for the main TN work

Requirement 2 once again involved financial data analysis and the ability to challenge estimates and

assumptions Although candidates had not seen a calculation of the required type, it should have been

straightforward as it simply involved multiplying a set of data together In the event, most did follow the

expected methodology and produced revenue and gross profit figures for each of the three years in

question Many were therefore able to achieve passing grades for the basic number-work

However, the approach towards the underlying estimates and assumptions was variable Many simply

accepted figures such as pupil numbers Weaker candidates often discussed only one or two assumptions, resulting in incomplete answers While not specifically asked for, sensitivity analysis on the numbers should have been an obvious next step when there were so many variables involved and the predicted margins

were relatively low In the event, hardly any candidates did any sensitivity analysis Quite a few said that

some should be done (this was not deemed worthy of reward under ‘Makes recommendations’) Coverage

of the practical considerations was mostly poor, even though most of these were a natural extension from

the analysis of the contract and the facts presented at Exhibits 16 and 17

Requirement 3 assessed wider business skills in relation to apparent problems with the contract for what

was by far Palate’s largest client, Humbells Hardware (HH) Candidates had seen from the AI: (i) a

summary of the HH contract; (ii) notes on the client as a whole and in particular on the resolution of

previous issues that had arisen on the same contract; (iii) a letter referring to operational problems at

another large client (AGBS); and (iv) a press article on “keeping your clients (happy)” They were also

expected to discuss the ethical aspects of the scenario presented – both the general point about apparently undue pressure being placed on Ogilvie by HH and the specifics of some of the issues raised

Those who had familiarised themselves with the AI in overall terms, who dealt in an orderly fashion with all

the main aspects – and who had allocated themselves sufficient time – managed a good spread of passing grades Weaker candidates tended to offer a ‘scattergun’ approach and so produced unstructured answers They even failed to offer a basic analysis of the specific Ogilvie issues – presented in a numbered list to

give a framework for students’ answers – which would have earned them good credit in the marking key

Thus Requirement 3 was far from being “open-ended”, as one tutor described it Indeed, as another noted,

it “built on information provided in the AI There was ample scope for candidates to apply their own

analysis It should have been manageable for a well-prepared candidate.”

In summary, in the words of one tutor: “The exam requirements were clear and unambiguous, and there

was plenty of information in the Exam Paper to use in your discussions [Candidates] 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.” As another commented, “well-prepared students should have read the AI a number of times and there was enough detail provided for them to have performed extensive financial and

strategic analysis before the exam Therefore they should have been able to explain the historic

performance of each division in their own words and been aware of the factors most likely [to] influence

2013 performance.”

PART 2: THE CASE STUDY EXAMINATION

Scenario for the paper (Advance Information)

The case relates to Palate Ltd, a contract catering company based in St Albans, just outside London

Palate has three business units, each operated as a separate division, though they form a single statutory

entity You, the candidate, are Phil Roberts, a final-year trainee ICAEW Chartered Accountant working for

Palate You report to the Director of Finance and Business Development, Samantha James

Four weeks prior to the examination, candidates were provided with a package of information, containing a series of exhibits relating to Palate and the industry in which it operates, comprising:

1 About you (Phil Roberts) and your employer (Palate Ltd)

2 The UK contract catering industry: Background

3 Contract catering: The business model

4 Palate Ltd: Overview of the business

5 Email dated 19 July 2012 from Samantha James to all Palate directors

6 Palate Ltd: Management accounts for the year ended 31 May 2012

7 Palate Ltd: Overview of business units (July 2012)

8 Palate Ltd: Example client contracts (summary of key terms)

9 The food service supply chain

10 Palate Ltd: The way forward (the board’s strategic overview, May 2013)

11 Letter dated 3 June 2013 from Morgan Catering Advisors to Palate Ltd and to Arno Girls’ Boarding

School, together with a note from Oswald King to Samantha James

Analysis of Advance Information (AI)

By carefully studying and analysing the AI, candidates should have formed a comprehensive picture of

Palate and the industry, using facts and figures from across the material The AI was, as always, intended to

be largely self-contained: the 38 pages contained a myriad of information with which candidates had to be

familiar Key points are summarised below: additional Examiner commentary is in bracketed italics, with

emphasis on connections between exhibits

After Exhibit 1 (candidate’s role), Exhibits 2-3 present an overview of the UK catering industry and

business model

(Industry exhibits are intended to ‘set the scene’, to provide an important context for the case and exam

requirements and to create a ‘level playing-field’ so that candidates do not have to carry out extensive

research of their own One key to a full appreciation of the AI is an ability to relate these general industry

issues (for example, in the Palate case: impact of Olympics, trends in schools catering, contract types) to

the company’s circumstances and to other material in the AI While candidates are not expected to commit every sentence of these exhibits to memory, they should aim to be aware of the main contents so that they can easily locate key topics in the exam hall Thus mention of food price inflation would have enhanced

candidates’ answers to both Requirements 1 and 2; the horsemeat scandal – which conveniently “broke”

during the early development of the case – and the related issue of traceability represented key knowledge for Requirement 3.)

Exhibit 4 documents Palate’s history and current position, describing how it won its first clients (through

personal connections of the three founding directors (Samantha James, George Watson, and Oswald King)); its expansion from the education sector into B&I clients and then catering at public events; the resulting

formation of three business units, each with its own management team, led by one of the main board directors (George, Oswald and Nasir Khan), joined by Samantha as Director of Finance and Business Development The exhibit goes on to discuss Palate’s subsequent tender success rate; its main business issues;

performance measurement, including wastage; contracts, pricing, payment; staffing, training; demand,

seasonality; menu development; and working capital, procurement, supply chain management and

sustainability (including its industry accreditations); quality assurance and inventory control (including the use

of “mystery diners”); and the importance of technology throughout Palate’s operations (including the use of cashless catering)

(Some of these points link back to the earlier industry information – see notes to Exhibits 2-3 They also

provide an obvious connection to the next two exhibits – 2012 business review and management accounts.)

Analysis of Exhibit 6 (the May 2012 management accounts) would reveal that:

 Revenue was up overall, from £19,027k to £20,658k (8.6%), with rises in all three business units: XX,

£9,007k to £9,594k (6.5%); TN, £5,881k to £6,337k (7.8%); and LA, £4,139k to £4,727k (14.2%)

 Cost of sales grew from £16,705k to £18,109k (8.4%), with rises of 8.0% and 8.3% respectively in the two main captions, food & consumables and wages, between them accounting for about 98% of cost of sales

In both cases, the extent of the increases varied between the business units

 Gross profit rose from £2,322k to £2,549k (9.8%), up in LA and XX business units but slightly down in TN

 Gross profit margin was fractionally up (12.2% to 12.3%), but with variations across the business units:

XX, from 11.0% to 11.9%; TN, from 18.5% to 17.0%; LA, from 5.8% to 6.9%

 Operating profit was up from £748k to £779k (4.1%), reflecting a 12.5% rise (£1,574k to £1,770k) in

administrative expenses Most of this relates to head office payroll costs, up from £1,009k to £1,171k

 Allowing for other items, after-tax profit was up from £577k to £602k

 Average catering staff salary cost was down from £16.5k to £16.3k, with numbers up from 466 to 501

 There were additions of £40k (2011: £37k) to property, plant and equipment (PPE) Overall, PPE

remained low, down to £98k from £131k

 There were small – mostly offsetting – movements in inventories, receivables and other current liabilities

 Within receivables, prepayments were up from £156k to £259k, suggesting higher “location fees” (see

below) for some TN clients in the following year

 Trade debtor days were down, 31.7 to 25.6; inventory days, 24.2 to 21.7; trade creditor days, 54.2 to 51.8

 Cash rose from £1,504k to £1,863k, mostly via operating profit generated, offset by dividend payments

of £300k (2011: £250k)

These management accounts should be read in close conjunction with Exhibit 5, in which Samantha James

briefs the directors on some of the key developments:

 Revenue is up on many flagship clients

 Despite margin pressure (notably at smaller TN clients), cost-cutting has ensured an overall healthy

gross profit trend

 Wastage is up from 4% to 5% (industry average = 8%) Kitchen equipment at some clients is not being properly maintained, and is being replaced or upgraded

 XX remains the largest business unit, with growth coming partly from small, one-off contracts

 TN has shown good revenue growth At V Park, now TN’s largest client, inefficient staffing needs to be resolved as the contract is due for renewal in 2013 Hall Golf Club has benefited from a charity

tournament Some smaller contracts that have become unprofitable are not being renewed

 LA revenue growth on some 2011 contract wins has been accompanied by increased gross margins

Lunches served at the three largest clients are up 10%

In summary, Palate is performing well in the recession, increasing both revenue and margins in 2012 TN

has the highest margin but it is the riskiest business unit, as it has more one-off contracts

(As always, time spent on the financial information would have been invaluable The management accounts and board briefing gave students plenty of information on which to carry out in-depth analysis on Palate prior

to the exam The industry background should have helped develop their wider sector knowledge, enabling

them to produce value-added analysis of the company’s performance They should have realised the need

to digest the summaries of individual clients at Exhibit 7 (see below) and their link to the financial data They may have identified that the Olympics and Jubilee would have an impact on the 2013 results, particularly for

TN, though this could be positive or negative.)

Exhibit 7 provides an overview of the three business units, with a summary of the three key clients in each

and then further information on two of the three Key points emerging from an analysis of this are as follows:

XX

 Some clients require only executive dining, others, a full daily canteen service

 Contracts range from two to five years Some are fixed price; others, cost-plus

 HH is the largest, with revenue £4,059k (2011: £3,631k) and gross profit £411k (2011: £374k) The

contract was renewed for 4 years from September 2011 and covers HH’s 1,200 head office staff and

1,000 superstore employees In September 2011, the parties engaged Ogilvie (independent catering

consultants) to identify any issues; these were resolved in time for the renewal

 The next biggest contract, Ross Laboratories (5 years from 1 June 2009) is around half the size Its

single site near St Albans employs around 2,500 staff Palate won the tender against three other bidders,

undertaking to refurbish the facilities before the contract began A cashless payment system is in place

TN

 TN revenue comprises both one-off work and significant regular and/or recurring annual business

 The client base covers a range of organisations (eg, country parks) and public events (eg, concerts),

with contracts generally being of the “concession-based” type

 Palate pays the event organiser a non-refundable “location fee” to gain entitlement to provide catering

 The three largest contracts (V Park, TGMF and Hall Golf Club) are similar in size: £1.2m to £1.5m in

revenue and around £0.2m in gross profit

 The V Park contract (4 years from 1 December 2009) covers the restaurant / bar, plus meeting rooms

Total visitors to V Park rose from 176k to 209k in the year to 31 May 2012 but numbers (and Palate’s

revenue) will be impacted by the local authority’s decision to charge admission from December

 In 2008, Palate won a 6-year contract for the annual August three-day TGMF Visitor numbers were:

296k (2010); 349k (2011) For the August 2012 event (“Nostalgia Weekend”), which will be reflected in the May 2013 accounts, some items are being sold at 2002 prices

LA

 Palate’s education clients comprise independent (day and boarding) schools and colleges

 At some day schools, Palate caters for other meals in addition to lunches (eg, breakfast for some pupils)

 Palate has three main rivals: Jordi (specialist schools caterer); Ravenous (established national firm now breaking into Hertfordshire having recruited a Palate manager); Trenchard (facilities management group)

 The largest client is AGBS: revenue, £1,147k (£1,112k); gross profit, £90k (£83k) The contract (5 years from 1 June 2009) covers 60 staff and 500 pupils Palate is also exclusive caterer for on-site conferences

 The next largest is Clarkstone (4 years from 1 September 2009), a specialist sports school with 1,700

pupils and 170 staff Revenue is £1,019k (£1,003k); gross profit, £86k (£80k) By revitalising the service, Palate increased take-up, revenue and profit in the first year and achieved the 95% target take-up

(It should be readily apparent that this is a critical exhibit, linking back to earlier information in the accounts and forward to the contract extracts that follow and to the AGBS letter at Exhibit 11 – see below.)

Exhibit 8 presents extracts from the contracts for two of the clients discussed in Exhibit 7 – HH and AGBS The contracts are both of the cost-plus type and are similar in many respects, with some small variations

They contain clauses relating to: period of contract; responsibilities of Palate; responsibilities of HH; pricing, payment and financial arrangements: and (HH only) sustainability

(Extracts from legal documents provide another dimension to information provided in the case, as well as a reference-point for the discussion of ethical issues.)

Exhibit 9 describes the supply chain and the respective roles of operators, distributors and wholesalers:

 With consumers increasingly questioning the origins of their food, caterers are experiencing a surge in

demand for food sourced locally, especially with appropriate “assurance”, eg, Red Tractor quality mark

 Caterers are adopting corporate social responsibility (CSR), including sustainable measures (eg, using only British meat to avoid exposure to overseas malpractice) and initiatives to reduce waste and energy

 To combat health issues, the Food Standards Agency (FSA) is encouraging caterers to include calorific values of meals on menus

(This provides context in particular for Palate’s own procurement procedures (Exhibit 4; see above) and its

‘Project Greenbuy’ strategic initiative – next exhibit – plus the sustainability clauses in the HH contract.)

Exhibit 10 (the board’s strategic overview) sets out possible 2013 commercial opportunities for Palate, in

both new (notably ancillary services) and existing markets (expanding catchment area for XX; tendering for

TN events reinstated after being cancelled in 2012; new schools (LA)) It also identifies threats to the

business, major ones including supply chain problems and breakdowns in client relationships Finally, it

describes Palate’s “key 2013 initiative – Project Greenbuy”, to be launched on 1 June 2013 with seven

objectives, including: reducing purchase quantities to cut wastage to 3%; reducing distances travelled by

delivery lorries; centralising all future buying The expected annual cost saving would be £300,000, with

revenue potentially increasing by 10% All purchases will continue to be made in the UK

(This exhibit also has links with other AI material, including: additional services (p9); health & hygiene (p32); food price inflation (various); Olympics / Jubilee (various).)

Exhibit 11 is a letter from Morgan Catering Advisors highlighting some issues on the AGBS contract, with a

comment from Oswald King to Samantha James that these need to be addressed urgently The issues

relate to record-keeping, staffing, refrigeration, lunchtime queuing and conference catering

(This exhibit comprises the mid-contract review foreshadowed at Exhibit 8 and linking back to some of the

features of the AGBS relationship set out in Exhibit 7 Candidates should have spent time thinking through

the implications of the issues raised as it was likely that they might have to address these in the exam or,

alternatively, respond to a similar independent review on one of Palate’s other major clients.)

Exhibits 12(i)-(v) are a series of press cuttings:

 In Exhibit 12(i), we learn that food price inflation will continue, possibly returning to the 2008 levels (8%)

 Exhibit 12(ii) offers some tips for “keeping your clients (happy)”, with “10 simple, commonsense steps”,

to retain strong relationships (eg, meeting the client regularly, conducting regular surveys)

 Exhibit 12(iii) announces that Palate’s rival Ravenous has won a contract at a new local school,

potentially worth £600,000 if the pupil roll reaches its projected 1,000 maximum (notwithstanding

increased local competition) Ravenous had defeated Palate in a recent bid for a nearby college

 Exhibit 12(iv) notes that, following an investigation, local schools are “clear” of horsemeat The FSA has urged those responsible for schools catering to have “rigorous procurement procedures” in place and to deal only with “reputable suppliers”

 In Exhibit 12(v), reports that five men have been jailed over a scam in which a major supermarket chain was overcharged by nearly £3 million in relation to fruit purchasing

(As always with press articles provided in the AI, these exhibits shed further light – and a different

perspective – on issues mentioned elsewhere, such as LA’s competition, client relationships and supply

chain management, as well as introducing new topics for debate, such as fraud.)

Overall, as one tutor remarked, “the AI provided students with a good understanding of the company and

industry The information was presented in such a way (eg, volume data but not for all contracts and

relatively brief descriptions of the different types of contract) as to encourage students to perform further

analysis and research Another commented that it “gave lots of information about the major clients”

Information provided in the Exam Paper (EP)

The Exam Paper contained seven new exhibits, comprising nine pages of new information:

13 Email dated 24 July 2013 from Samantha James to you

14 Palate Ltd: Draft management accounts for the year ended 31 May 2013

15 Email dated 11 July 2013 from Nasir Khan to Samantha James

16 Email dated 23 July 2013 from Oswald King to Samantha James

17 Article dated 23 July 2013 from Catering Now

18 Email dated 22 July 2013 from George Watson to Samantha James

19 Letter dated 17 July 2013 from Ogilvie Catering Consultants to Palate Ltd and to Humbells Hardware

Exam requirements

I would like you to prepare a draft report to the board, in which you should:

1 Review the results of TopNotch (TN) business unit, and the results of our client Hertfordshire Late

Spring Fair (HLSF), for the year ended 31 May 2013

You should compare TN’s revenue, cost of sales and gross profit (Exhibit 14) with those for the year

ended 31 May 2012, having first adjusted the draft 2013 management accounts to exclude the results of

both HLSF 2012, held in June 2012, and HLSF 2013, held in May 2013 (see Exhibit 15) You should

refer as necessary to the analysis in Note 1 of the accounts You should then review the results of the

HLSF 2013 event by comparison with both the HLSF 2012 and HLSF 2011 events

2 Evaluate whether Palate should tender for the Vynes Independent School (VIS) contract, as requested

in Oswald King’s email dated 23 July 2013 (Exhibit 16)

Your evaluation should comprise a calculation of Palate’s minimum revenue and gross profit to be

earned in each of the first three years of the VIS contract, based on the assumptions and estimates set

out in Exhibit 16, together with an assessment of these assumptions and estimates and of the practical

considerations associated with the contract

3 Discuss the steps that we need to take to address the issues raised in the letter from Ogilvie Catering

Consultants (Exhibit 19), as referred to in George Watson’s email (Exhibit 18)

Your discussion should be set in the context of both our desire to maintain a strong and profitable

relationship with HH and our recent strategic review (Exhibit 10) Where appropriate, please also identify

any wider implications for Palate as a whole and any ethical concerns that arise for Palate

Candidates were also told to include an executive summary and to balance their report across the three

detailed requirements They were given a suggested time allocation, unchanged from recent Case Study

exams, as well as other guidance that should now be familiar in relation to executive summaries, the

discussion of ethical issues within their answer to the requirements, the need to attempt all requirements and, for each of these, to address all four skills areas: Assimilating and Using Information (A&UI), Structuring

Problems and Solutions (SP&S), Applying Judgement (AJ) and Conclusions & Recommendations (C&R)

The time allocation suggested to candidates was:

Candidates should have spent time studying Exhibit 13 carefully so as to understand the requirements and key elements of each; digest the other new exhibits (management accounts and email about HLSF; email

and press article about VIS; email and letter about HH); and identify the related AI exhibits to integrate into their answers

For Requirement 1, candidates should then have begun a more detailed review of Exhibits 14 and 15,

enabling them to adjust and then assess the 2013 TN accounts in the light of their analysis of past results

(including visitor numbers) carried out in preparation for the exam, together with a commentary on HLSF –

for which all relevant figures were newly presented but which had to be analysed in the same way For

Requirement 2, it was essential to read Exhibits 16 and 17 carefully so as to understand the format of the

contract being proposed and to identify all the critical estimates and assumptions Finally, for Requirement

3, candidates had to digest Exhibits 18 and 19 and relate them to relevant material within the AI referring

both specifically to HH (Exhibits 7 and 8) and generally to the issues raised

With proper time allocation, candidates should have been able to complete these tasks within the four hours available to write a well-balanced report A danger may have been to spend too long on Requirement 1 so

that Requirement 3 was rushed and thus unstructured or short of content

Analysis of Exam Paper information

From an initial reading of the new exhibits, candidates should have established that:

 TN’s 2013 results are distorted by the inclusion of an event that was held twice in the same financial year

 Palate has an opportunity to tender for the catering contract at a brand-new school

 The catering at Palate’s largest client has been the subject of a negative report by external consultants

A more detailed review of the EP should then have elicited the key facts to be addressed in the exam

Candidates should recognise that they are to concentrate on the results of TN and are not expected to

discuss the statement of financial position or cash flow Their analysis must also make relevant reference to

‘Note 1’ – the table of revenue and gross profit by client, together with its footnote on visitor numbers

To do their analysis, they first had to adjust the management accounts (Exhibit 14) to remove the results of the two most recent HLSF events (using the figures provided at Exhibit 15), which had both occurred in the

year as a result of Jubilee-related schedule changes To answer the requirement fully, their adjustment

schedules had to incorporate cost of sales figures that excluded HLSF They should have realised that

HLSF was part of the ‘Other’ caption in Note 1 and so the results of the three named TI large clients were

unaffected by the adjustments However, while it would be possible to perform some analysis on these three clients without making the adjustments, a more logical technique was to make all the adjustments first so as

to give the correct like-for-like position for TN as a whole

Comparing the adjusted 2013 management accounts against the original 2012 management accounts

(Exhibit 6) and client breakdown (Exhibit 7) in the AI would then reveal that:

 TN’s overall revenue for 2013 is £5,819k (down £518k or 8.2% on 2012); cost of sales, £4,879k (down

£380k / 7.2%); gross profit, £940k (down £138k / 12.8%); gross margin was down from 17.0% to 16.2%

 V Park revenue is down 16.5% to £1,202k (visitor numbers down 24.4% to 158k); gross margin to 13.1%

 TGMF revenue is up 19.1% to £1,583k (visitor numbers up 25.2% to 437k); it is now TN’s biggest client

 “Other” revenue is down by 17.0% to £1,893k; gross profit up to £312k; and gross margin is 16.5%

 In cost of sales, food and consumables are down 11.2% to £2,304k; and wages by 5.7% to £2,330k

Exhibit 15 explains the impact of the Hertfordshire Late Spring Fair (HLSF):

 All revenue and costs from both “HLSF 2012” and “HLSF 2013” are recognised in the 2013 accounts, as the 2012 event was held (over four days) in early June 2012 to coincide with the Queen’s Diamond

Jubilee celebrations while the 2013 event took place (over three days) in its traditional late-May slot

 The results from HLSF 2012 were therefore abnormal but a series of issues has also meant that the

2013 event earned less revenue and profit than in 2011 and earlier years

(Candidates will have expected to be presented with 2013 management accounts and to analyse them The requirement – described by one tutor as “innovative” – to cover only one business unit, to gross profit level only, rather than the whole company and the other primary statements, should have been welcome, even if some additional work was needed to get to the starting-point (Figures for the other business units would be useful,

on a smaller scale, for Requirements 2 and 3 – see below.) Similarly, while they had not previously seen any detail on HLSF, the inclusion on a single page of all relevant information should have enabled them to focus on the key points arising for the second part of the requirement.)

Exhibit 16 is an email from Oswald King to Samantha James, referring to Exhibit 17, a Catering Now article:

 Vynes Independent School (VIS), due to open in September 2013, is seeking a replacement caterer as the original choice, Jordi, has gone into administration

 The caterer will have to be financially stable, offer a menu matching VIS’s vision and give value for money

 Palate’s rival, Ravenous, has already announced its intention to tender

 VIS will begin with 400 pupils, rising to 800 in 2014 and 1,200 in 2015 Staff numbers, starting at 50, will grow in proportion

 The dining area can hold 600 There are two kitchens Some of the site could be hired out for conferences

 Under its “liberal” ethos, VIS will allow pupils to leave the premises at lunchtime A nearby fast food outlet and sandwich shop – which might be an attraction to VIS’s pupils – are both busy

 Experts say that the contract could eventually generate annual revenue of £650k

 The tender would reflect a guaranteed minimum number of meals for three years, using agreed estimates for average take-up (60% in Year 1, 75% in Year 2, 90% in Year 3) and revenue per meal (£2.50 in Year 1,

£2.75 in Years 2 and 3) payable by VIS to Palate

 VIS would pay Palate one-third of the total annual minimum guaranteed revenue at the start of each term

 Oswald King anticipates gross margins of 5% in Year 1, 10% in Year 2 and 15% in Year 3, reflecting likely economies of scale, plus stable food costs, menus and staffing ratios

(These two exhibits taken together gave candidates a clear set of steps to follow: calculation; assessment of estimates and assumptions; and discussion of practical considerations An initial read should have revealed that: the basic calculation was not complex; there were a number of variables whose questionability was

well signposted; and there were plenty of issues to address for a new business with little more than a month

to settle its catering arrangements Many of the points raised across Exhibits 16 and 17 should have rung

bells from the AI – eg, contract types (Exhibit 3), Ravenous (Exhibits 7), take-up rates at other schools

(Exhibit 7), previous new schools (Exhibit 12(ii)), lunchtime competition and conference catering (Exhibits 7 and 11).)

From Exhibits 18 (internal email) and 19 (letter from Ogilvie), we learn that:

 Ogilvie has identified a number of issues during a 5-day review at HH’s head office catering operations These cover: wastage; unclear food labelling and menus potentially endangering diners with allergies;

use of lower-grade imported meat from a local wholesaler with apparently poor tracing procedures; the projected failure to achieve contractual sustainability targets; a proposal by Palate’s new chef at HH’s

head office to source fruit from a Spanish agricultural producer where his cousin is managing director

 Ogilvie may have been put under pressure by HH’s directors to write a negative report as HH is cutting costs across the business and wants to renegotiate the contract on more favourable terms

 HH may convert part of one superstore into a customer restaurant, a potential extension to the contract

 Feedback from Palate’s “mystery diners” has contradicted Ogilvie’s comments on wastage

(With proper preparatory work on the AI, candidates should have been ready for a requirement of this

nature HH features in Exhibits 7 and 8, and there is also an equivalent report on another large client –

AGBS – at Exhibit 11 Additionally, awareness of Palate’s strategic thinking (Exhibit 10), sustainability issues generally and the horsemeat scandal in particular should have stood them in good stead to address the

specific issues raised by Ogilvie.)

The EP develops a number of features of Palate’s business from the AI, each needing a different technique for advising the board Exhibit 13 sets out the route to be followed in writing the report:

 Requirement 1 entails a clear focus on financial statement analysis, covering all the items specified

 Requirement 2 involves financial data analysis together with a broader business perspective and a

strong element of professional scepticism

 Requirement 3, although mainly covering one client, also gives rise to “wider implications for Palate as

a whole” To do justice to these, familiarity with its strategic objectives and the wider scenario is needed

In all cases, a logical approach with careful planning would have reaped dividends

Summary of grades available

The Examiners identified five topics for which grades would be awarded, corresponding to the requirements: Executive summary; Review of TN business unit; Evaluation of VIS tender; Response to HH issues; Overall paper Candidates were rewarded according to how well they demonstrated, under each of these topics, their application of the four Professional Skills 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, candidates were awarded one of five available grades:

A&UI SP&S AJ C&R Total

40

PART 3: COMMENTARY ON CANDIDATES’ PERFORMANCE

Overview of professional skills

Assimilating and using information (A&UI)

In each of the three main requirements, there were two skills boxes available under A&UI, one for use of

the AI and EP and the other for referring to Palate’s business issues and the wider context

For Requirements 1 and 2, the first box covered the calculations needed as a springboard for analysis In

Requirement 3, it referred to the specific context in which the HH review was being conducted The majority

of candidates achieved passing grades for each requirement, displaying in particular the ability to tackle

computational work effectively

The second box for Requirements 1 and 2 was also well done, but at Requirement 3 it was a differentiator

between those who had familiarised themselves with the wider context and those who had not The AI had provided background on the industry and Palate’s business history, finances, key clients and strategy Within each topic, other themes had to be identified – but then contextualised and integrated into the report with a meaningful link to their impact on Palate In two cases (recession and food inflation), an issue was relevant in more than one requirement Gratifyingly, most candidates showed an awareness of the catering industry’s

pervasive 2013 issue: the horsemeat scandal and food traceability Some used own research effectively (eg, proposed clampdown on packed lunches; demand for independent schools; allergy statistics)

Structuring problems and solutions (SP&S)

For Palate, candidates generally displayed good SP&S skills, with a majority of passing grades being

earned in the first two boxes for each requirement This is largely because most candidates, especially the

successful ones, followed the instructions at each requirement:

 Requirement 1: Financial analysis on adjusted results and on HLSF

 Requirement 2: Calculation of revenue / GP for VIS, with commentary on assumptions and sensitivity

 Requirement 3: Initial discussion of the Ogilvie issues (including ethics)

Strong candidates worked logically through each step, dealing with them in appropriate detail; weaker

scripts frequently had important gaps This applied primarily in connection with Requirements 2 and 3 At

Requirement 2, candidates did not reflect on their opening calculations to see how they might be affected by changes in assumptions, or indeed go on to flex these calculations In Requirement 3, the analysis of ethical issues – both the context of pressure on Ogilvie and the specifics of its letter – entailed some developed

thinking, and this was a step too far for many candidates

For each part of the report, SP&S is the pivotal skill on which all further work builds Any weakness here will also inevitably affect the subsequent sections of AJ and C&R

Applying judgement (AJ)

Performance at AJ showed a marginal improvement for this sitting The best scripts contained reasonable,

balanced and appropriate judgements built on analysis and demonstrating a logical flow of decision-making and real understanding of the case However, AJ remains a significant differentiator at the lower end of the cohort, weakness here being positively correlated with a failure overall

At Requirement 1, evaluation of financial analysis on revenue was good, with candidates in particular using information on visitor numbers to explain their numerical findings Evaluation of cost of sales and gross

profit was less well done, requiring as it did a more rounded understanding of the dynamics of TN’s income statement Finally, evaluation of analysis on HLSF – all the detailed information for which was provided on

the day – proved too much of a challenge for weaker students

For Requirement 2, there was a consistent performance across the three AJ boxes Better candidates were able to think about the wider ramifications of the tender opportunity as well as applying their professional

scepticism in questioning the related numerical data They linked their discussion effectively to other case

material (eg, competitors, financial results of LA business unit) Some professional scepticism, though intentioned, was perhaps misdirected: “The school has a liberal ethos so there are concerns over whether

well-the students will be well behaved and clear well-their trays … There is also no mention of security of our

equipment, cutlery or crockery.” The final point in the AJ column gave a chance to those who had expected

to discuss the whole company at Requirement 1 to show their understanding of Palate’s overall accounts

For Requirement 3, those who had addressed the specific Ogilvie issues under SP&S (the majority) went on

to score highly under the related AJ box However, boxes 1 and 3 were less well done – especially the latter, where professional scepticism was again being tested In this instance, the emphasis was on possible bias (intended or otherwise) in the information given, and too many candidates were unable to articulate this, just accepting the issues in Ogilvie’s letter at face value There was also little consideration of whether the

review was representative (5 days only, head office only) Not for the first time, weaker ones inappropriately presented ‘professional scepticism’ as a heading within their report

Conclusions and Recommendations (C&R)

This skill was more variable than usual and overall the weakest of the four In general, conclusions were

better than recommendations

Suitable conclusions were mostly provided at Requirements 1 and 2 but only a minority gained a passing

grade for Requirement 3 – perhaps an inevitable consequence of an unstructured discussion For

Requirement 1, weaker candidates did not restate the revenue and GP figures or they commented on total costs rather than individual categories For Requirement 2, most conclusions gave the financial impact,

made some statement on an assumption and said that Palate should proceed, thus gaining a passing grade

A feature of all three requirements, notably 2 and 3, was a lack of practical, commercial recommendations The recommendations included on the marking key were quite generic and followed very logically from the foregoing work, yet too many candidates failed to make them At Requirement 1, answers mainly focused on negotiating admission fees with the Council (for both VP and HLSF) and on which clients should be re-

tendered for, resulting in a majority of IC and SC grades At Requirement 2, better ones included: “Palate

should review its current costs and resources and see what impact a large new contract would have on

existing contracts.”

At Requirement 3, recommendations mainly focused on the issues rather than Palate’s wider situation – or were too glib in their response to a potential crisis scenario: “Project Greenbuy initiative addresses all the

adverse HH review comments even though the issues have not been proven in person.” The most common,

misguided, recommendation was for Palate to seek another independent review Among more entertaining suggestions were the following: “A quality control team should be set-up or beefed up to offer assurance to Oswald and George the Gourmet chef ” and “send a person to the actual fruit land overseas”.

Executive summary

Similar numbers of passing grades were achieved for the sections on Requirements 1 and 2 Fewer were

earned on Requirement 3, mirroring candidates’ performance in the main body of the report However,

within each section the number of passing grades for the two boxes varied: for Requirement 1, candidates

did much better in the second box, while for each of Requirements 2 and 3 the results were similar for the

two boxes.Overall, grades were higher than in recent sittings: candidates recognise that, as the executive

summary represents 15% of the total grades available, failure to give it the appropriate attention is a

high-risk strategy Consequently, they have improved their skills in preparing succinct, focused summaries

Time pressure continues to be a problem for weaker candidates They write too little – sometimes one

paragraph on each requirement (or even nothing on a requirement)

For Requirement 1, there can be a tendency to include too many numbers On this occasion there were too

few – eg, adjusted TN revenue and gross profit, but no figures for individual clients and only one for HLSF

At Requirement 2, most candidates did provided the contract numbers with a conclusion to proceed Many

questioned an assumption but did not always fully explain why it could be questioned In addition, they often

failed to discuss contract risks/benefits or practical considerations Sensitivity analysis was usually ignored

For Requirement 3, the main problem was diving straight into a recommendation, thereby not earning the

points in box 1 The ethical/independence point was also often ignored, or issues were incorrectly heralded

as unethical Consistent with the main body of the report, wider commercial recommendations were sparse The authors of the best summaries had thought through their analysis to provide added-value advice:

 “Admission prices have changed and affected gross profits and margins Palate should look to discuss these prices with the Council and perhaps suggest changes to the structure.” (Requirement 1)

 “When tendering, previous success in improving take-up should also be emphasised.” (Requirement 2)

 “Benefits of Greenbuy should be explained to HH to help the relationship going forward.” (Requirement 3)

Requirement 1: Review of TN performance

This should have been a straightforward section – and for most candidates it proved to be They focused

appropriately on the set tasks They should have expected the 2013 management accounts and so been

well prepared to review them – though perhaps not the required focus on a single business unit Those who had anticipated an analysis of the business as a whole should have been relieved at the scope of the

requirement, even if they had to do some preliminary work to derive the relevant figures Less adaptable

candidates floundered in a sea of numbers and so produced irrelevant commentary The challenge was to

carry out the adjustments efficiently and to ensure sufficiently detailed analysis The reference to note 1 of

the accounts – results (including, where applicable, visitor numbers) for individual clients – was crucial here Most tackled the core financial statement analysis methodically, using the headings given (revenue, cost of sales and gross profit) to ensure coverage of all the main elements, with the gratifying result that a strong

majority achieved passing grades throughout A&UI and at SP&S box 2 However, the developed skills of AJ and C&R proved the undoing of weaker students

A small number adjusted the TN revenue incorrectly, or did not adjust it at all – or, in a tiny majority of cases

(see the Second Illustrative Script), adjusted the results of Palate overall They thus missed the first two

points under A&UI However, the majority did manage a passing grade in this first box For “identifies

business issues and wider context”, most candidates discussed the Olympics/Jubilee and inflation

When performing the financial analysis, candidates rarely covered TN’s client mix Many discussed in detail

V Park and TGMF (which were showcased at Exhibit 7 and thus perhaps viewed as being the important

clients) but not HGC (which had been only briefly mentioned, in Exhibit 10) Similarly, as HLSF had been

removed for separate analysis, candidates assumed that there was nothing else worthy to say about “Other” clients – even though this category was where the main downward movement had occurred

In explaining revenue, most candidates observed that visitor numbers had been impacted by admission fees / Nostalgia Weekend These were basic facts from the case: it proved a good differentiator to calculate and

comment on revenue per visitor, an extra piece of analysis which candidates had to think of It was surprising

that more did not do this as the equivalent data was available in the AI and they should have used it as part

of their preparatory review of the prior year accounts

Coverage of cost of sales (COS) and gross profit (GP) was quite poor Many candidates just quoted GP for

TN, VP and TGMF (sufficient for an IC grade) but did not give any reason for reductions other than that they were revenue-driven For COS, scripts were often characterised by general or bland statements (eg, “Cost control within cost of sales appears to be good, which is promising as margins are expected to be squeezed even tighter going forward.”) Such candidates did not cover any individual costs – except perhaps location

fees as these showed the biggest percentage movement despite being small in value Wages and food &

consumables – by far the most significant captions, between them accounting for 97% of COS – were not

addressed in detail by many candidates

The least predictable part of the requirement (HLSF) was, perhaps inevitably, the least well done Candidates generally earned credit under SP&S but struggled with the evaluation points under AJ Though the information was new, the general approach was no different from that already adopted for the rest of the TN business and, with a modicum of common sense, candidates could have explained the key movements appropriately

In summary, a well-prepared candidate was able to demonstrate full familiarity with the broad sweep of the case material in a succinct way The very weakest candidates wrote only two pages and so did not provide enough detail to achieve passing grades

Requirement 2: Evaluation of tender for Vynes Independent School (VIS) contract

There were in effect three elements:

 Revenue and profit calculation

 Discussion of assumptions (professional scepticism)

 Practical considerations

Revenue and profit calculation

Candidates had to perform a relatively simple calculation, and the vast majority got it wholly correct, thus

gaining passing grades at the relevant places (AU&I box 1, SP&S box 1) The figure of £650k (mentioned in Exhibit 17 as an experts’ estimate) should have provided reassurance to candidates that their revenue of

£635k for year 3 was in the right range The commonest error was in not multiplying by 190 days but this