Additional

ICAP
Practice
Questions

Management professional competence

Additional Practice Questions iv The Institute of Chartered Accountants of Pakistan
 Multi Subject Assessment - 2

C
Management professional competence

Contents
Page

Question and Answers Index v

Questions
Section A Questions 1
Answers
Section B Answers 11

Additional Practice Questions v The Institute of Chartered Accountants of Pakistan

Multi Subject Assessment - 2

Additional Practice Questions vi The Institute of Chartered Accountants of Pakistan

 Multi Subject Assessment - 2

I
Management professional competence

Index to questions and answers

Question Answer
page page

1. LAHORE WORLD TRAVEL LTD 1 11

2. THE FRESH FISH COMPANY 5 18

3. TECHCON LTD 7 22

Additional Practice Questions vii The Institute of Chartered Accountants of Pakistan

Multi Subject Assessment - 2

Additional Practice Questions viii The Institute of Chartered Accountants of Pakistan

 Multi Subject Assessment - 2

A
Management professional competence

SECTION
Questions
1 LAHORE WORLD TRAVEL LTD
It is 1 December 2018 and you are a trainee accountant of Derawal & Sahi, a Lahore-based accountancy
firm, who have been engaged by Lahore World Travel Ltd (LWT) to provide business consultancy advice
regarding possible acquisition of a UK-based company, Safari Adventure plc, listed on London Stock
Exchange.
LWT is a long established, large and successful travel company based in Lahore and is listed on the
Pakistan Stock Exchange. LWT provides travel services to different sectors of the travel and holiday
market including:
 corporate travel services;
 low cost travel packages to destinations in Pakistan, Europe and Asia; and
 travel solutions for the luxury travel market, such as arranging bespoke travel and holiday
requirements, world cruises and guided adventure tours.
LWT provides a personal service by assigning a personal travel advisor to each customer and also
arranges adventure tours such as trekking in the Himalayas Mountains. LWT has sales and customer
service centres in Pakistan's main cities so customers can book in person as well as over the telephone.
Zahid Bashir is the Chief Executive Officer of LWT. He considers LWT's approach to customer service
and creative travel solutions as the two principal reasons why LWT has achieved continual growth and
profitability over the past thirty years to become one of the best known travel companies in Pakistan.
Zahid believes growth and shareholder value can be achieved by applying its core competencies and
unique resources to other types of travel businesses. LWT has recently been approached by the directors
of Safari Adventure plc with an offer for sale. The LWT Board of Directors has requested your assistance
in valuing the potential acquisition of Safari Adventure plc and advising on how it should proceed.
Requirements
(a) Critically evaluate the potential acquisition of Safari Adventure plc by LWT (Appendix 1 and Appendix
2). Your evaluation should include a performance analysis and pros and cons of the potential
acquisition.
(b) Determine the value of the new combined group after the acquisition and the maximum price that
LWT may pay. Also advise the Board of Directors of LWT whether or not to proceed with the offer
price of Rs. 9,000 million (Appendix 3).
Note: All workings should be done to the nearest Rs. in million. State and explain any assumptions.
(c) Assuming the offer of Rs. 9,000 million is accepted, determine the impact on control, gearing and
earnings per share if the acquisition is funded with new debt or by issuance of shares and give
appropriate recommendations to the LWT's Board of Directors. Note: Ignore tax

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Multi Subject Assessment - 2

(d) Explain the key areas which a due diligence exercise should include prior to finalizing the agreement
to acquire Safari Adventure plc.
(e) In the last board meeting, while discussing the potential acquisition of Safari Adventure plc, Shahbaz
Karim, one of the directors of LWT apprised that through Finance Act 2018, a concept of Controlled
Foreign Company (CFC) has been introduced. Accordingly, the income of Safari Adventure plc would
be considered as income received from CFC. He also stated that LWT may also opt to be taxed as
one fiscal unit.
Draft a note for the board of directors covering the tax implications of the following matters:
 Views expressed by Shahbaz Karim
 Treatment of dividends to be received from Safari Adventure plc
 Each financing option being considered by LWT

APPENDIX 1 – STRATEGY AND ACQUISITION OPPORTUNITY

Four years ago, LWT acquired a competitor travel company in Pakistan, Lux Travel, which was very
successful in providing luxury travel arrangements to many of Pakistan's wealthiest people. This
acquisition has been largely successful, however it was expensive and financed with loans which are
repayable in 2024. The acquisition has occupied a great deal of management time over the past few
years. A key focus has been to resolve integration issues with LWT's own travel booking processes and
computer systems.
LWT's recent strategy has been to focus on growing its corporate travel services division. However, the
board of directors has become increasingly concerned about a forecast decline in LWT growth. In
response, the CEO, Zahid Bashir believes it is time to consider further acquisitions to help LWT achieve
its strategic objective of being the market leader in the package, corporate and luxury travel markets.
As a result, the board of directors is considering purchasing two safari parks in Malawi (an East African
country) and one safari park in Botswana (a South African country) operated by a UK company,
Safari Adventure plc (Safari). It is unclear why Safari is looking to sell, however, Zahid believes this is an
opportunity to buy a company at a low price and create new revenue opportunities by selling luxury safari
holidays to LWT's extensive wealthy client base.
This acquisition represents a diversification from its current operations as LWT has no previous expertise
in running hotels or safari parks, but the board understands that the existing management of Safari is
talented and the employees operating the safari parks have significant expertise. None of the LWT
directors has yet visited Safari's head office in London or any of the three safari parks in Malawi and
Botswana.
LWT’s share capital consists of 40 million shares which are currently trading at Rs. 500 per share.
Additionally, LWT has outstanding loans of Rs. 10,000 million which are due for repayment in December
2024.
The directors of Safari have submitted a letter to the LWT Board of Directors stating that their
shareholders are likely to accept an offer of Rs. 9,000 million for 100% equity in Safari Adventure plc.
This offer price represents a 20% premium on Safari’s current London Stock Exchange share price of
£2.50 per share.
Safari is currently ungeared and its paid up capital consists of 20 million shares.

APPENDIX 2 – COMPANY PERFORMANCE DATA PROVIDED BY USMAN SARBANI, LWT'S

OPERATIONS DIRECTOR
Dear colleagues at Derawal & Sahi,
As you know, LWT hasn't extensively advertised in the past ten years as our policy has been to rely on
our reputation, returning customers and word-of-mouth recommendations.
Each customer enquiry is assigned to a travel executive who deals with all of the customer's booking
needs. Returning customers who wish to make another travel booking contact the company's general
telephone number or their previously assigned travel executive. Once a travel booking is complete, it is
filed with a transaction reference number. However, there is rarely a need to access a past travel booking
unless there is a customer complaint. This has never been too much of a problem for LWT.

Additional Practice Questions 2 The Institute of Chartered Accountants of Pakistan

 Questions

Historically, LWT has avoided expensive, detailed management reporting as we have focused on
customer service. However, here is the recent performance data of the companies from our management
accounts and from information emailed to me by Safari Adventure plc.

11,892 11,458

I've also included the following useful extracts from the October 2018 LWT board minutes which will help
with your evaluation.
The Finance Director, Adeena Malik, explained that LWT's failure to meet its 2018 revenue target of Rs.
12.5 billion was attributable to challenging economic conditions affecting the travel market. Recent growth
has been predominantly in the corporate sector by winning tenders to exclusively supply corporate travel
services.
The Commercial Director said that growth at Safari Adventure plc is impressive, with an 8% increase in
customers in 2018 and 7% increase in customers in 2017. This information was included in their recent
letter offering the company for sale for Rs. 9,000 million. LWT's own research indicates that popularity of
safari holidays has increased over the past five years as wealthy travellers seek a different vacation
experience and are particularly attracted by the opportunity of observing a wide variety of African wildlife
such as lions, giraffes and elephants in their natural environment. He expects this growth trend to
continue. He informed that the three Safari Adventure plc sites are vast wildernesses of many hundred
square kilometres and are often booked up during high season at least one year in advance. Expansion
of the Botswana site in 2017 increased the number of available rooms by one third.
APPENDIX 3 – EMAIL FROM ADEENA MALIK, THE FINANCE DIRECTOR OF LWT
The Commercial Director said that growth at Safari Adventure plc is impressive, with an 8% increase in
customers in 2018 and 7% increase in customers in 2017. This information was included in their recent
letter offering the company for sale for Rs. 9,000 million. LWT's own research indicates that popularity of
safari holidays has increased over the past five years as wealthy travellers seek a different vacation
experience and are particularly attracted by the opportunity of observing a wide variety of African wildlife
such as lions, giraffes and elephants in their natural environment. He expects this growth trend to
continue. He informed that the three Safari Adventure plc sites are vast wildernesses of many hundred
square kilometres and are often booked up during high season at least one year in advance. Expansion
of the Botswana site in 2017 increased the number of available rooms by one third.
To: Derawal & Sahi Partners
Date: 4 December 2018
Subject: Valuation of Safari Adventure
As we discussed, LWT is considering an offer to purchase Safari Adventure plc for Rs. 9,000 million. This
acquisition could represent good value for our shareholders and an opportunity for LWT to diversify within
the travel sector and apply our focus on customer service to add value.
We would like Derawal & Sahi to determine the combined value of LWT and Safari Adventure plc. Here
are our forecast of free cash flows (FCF) which are stated after all taxes for both companies based on
our own projections for LWT, and from information supplied by Safari Adventure plc in their offer for sale.
Year to Year to Year to Year to Year to
30-Jun-19 30-Jun-20 30-Jun-21 30-Jun-22 30-Jun-23
Lahore World Travel Rs. in million 2,500 2,700 2,900 3,000 3,100
Safari £ in million 5.0 5.2 5.4 5.5 5.5

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Multi Subject Assessment - 2

Here is some additional forecast financial information which I have compiled for you to assist with your
valuation:
 Additional profit after tax of Rs. 150 million per annum will be generated from 2019 onwards by
selling luxury safari holidays to LWT's existing customer base although this revenue synergy
could be much higher.
 Surplus land at one of the Malawi safari parks can be sold to a local housing developer for
equivalent to Rs. 500 million at the end of 2019 without impacting on the forecasted free
cash flows. This land is not currently used by the guests of the Safari park.
 To be prudent I would like you to assume combined group cash flows for 2024 and beyond are
forecast as remaining the same as 2023.
 LWT's post-tax weighted average cost of capital will remain at 9% following the acquisition of
Safari Adventure plc so this can be used to value the new combined entity.
 The existing exchange rate of £1 : Rs. 150 is not expected to change significantly.
There are two possible financing options.
Option 1 – Borrow and acquire with cash
We could finance the acquisition with a further bank loan at a post-tax interest rate of 6% which is
comparable to our existing bank loans.
The directors of LWT have expressed some concern about the current level of gearing, however Zahid
and myself believe that the additional operating profit generated by the safari parks will far exceed the
cash required to service the additional debt finance.
Option 2 – Acquire with a share for share exchange
An alternative is to acquire Safari Adventure plc by offering new LWT shares instead of cash. An
investment bank has initially advised that based on current equity values, an offer of 1 new LWT share
for each existing Safari Adventure plc share would be acceptable to the shareholders of Safari Adventure
plc.

Kindest regards,
Adeena Malik

Additional Practice Questions 4 The Institute of Chartered Accountants of Pakistan

 Questions

2 THE FRESH FISH COMPANY

The Fresh Food Company is based in Karachi and is a very large corporation in the Pakistan food
industry. It owns many food processing companies and its Board of Directors is currently considering the
strategic value of its fishing subsidiary, the Fresh Fish Company (FFC). FFC has three operating divisions
as follows:
(i) The Fishing Division: This division operates a large fishing fleet operating off the coast of
Karachi for catching of fish and shellfish. The catch is transferred to FFC's processing and
restaurant divisions as well as local fish markets, other local fish processors and
restaurants. This division also owns and operates four fish farms in various coastal areas in
Pakistan.
(ii) The Fish Processing Division: This division is concerned with processing and canning fish,
which is sold and transported to other external fish markets and to Karachi-based
restaurants. This division operates its own fleet of trucks to transport fish directly from the
Fishing Division and fish canning plants to the restaurants managed by Fish Restaurant
Division and external customers (including wholesalers, supermarkets and fish markets.)
(iii) The Fish Restaurant Division: This division operates the 'Karachi Fish Diner' chain of twenty
restaurants across Pakistan's major cities.
The Fishing Division
Fishing is a significant industry in Pakistan due to the 1046 km coastline along the Arabian Sea. Karachi
Fish Harbour is the largest fishing harbour in Pakistan and can accommodate almost all modern
commercial fishing vessels.
Fishing provides a large amount of employment along these coastal areas and is a major contributor to
Pakistan's exports. 90% of fish and other seafood caught in Pakistan pass through the Karachi Fish
Harbour. The popularity and the price of fish has risen in recent years due to increasing affluence driven
by economic growth in Pakistan.
The Pakistan fishing industry is regulated by the Fisheries Development Board which is part of the
Ministry of National Food Security & Research. The Fisheries Development Board sets the rules and
policies regulating the fishing industry in Pakistan and ensures its waters are not over-fished.
The Fishing Division was formed in 1992 when the company bought three small fishing fleets and
consolidated them into a single fleet. The Fishing Division has over 200 fishing vessels of different sizes
and ages and accounts for just over 10% of the total number of fishing boats operating in Pakistan's
waters. The main catch is shrimp, tuna, snapper, grouper and sardines. The Fishing Division has
recorded consistent profits since its formation but it is operating in an increasingly competitive market
place with new competition each year fishing in the same Pakistan waters.
Since the Arabian Sea has suffered from over-fishing in recent years, the Pakistan government
introduced quotas several years ago in an attempt to conserve fish stocks. In response, four saltwater
fish farms were acquired six years ago by the Fishing Division. These are in areas of the ocean close
to land where fish are protected from both fishermen and natural prey. Fish stocks can be built up quickly
in these fish farms. FFC originally saw this acquisition as a way of ensuring supply to its other divisions.
40% of fish caught or farmed by the Fishing Division is currently processed by the Fish Processing
Division and 10% is sold to the Fish Restaurant Division. The rest of the catch is sold to other fish
processors in Pakistan, wholesalers and restaurants.
The Fish Processing Division
The Fish Processing Division was acquired nearly 20 years ago when FFC bought the assets of the
Karachi Canning Company. Government grants were made available to the Fish Processing Division to
develop industry in an attempt to address the economic decline and high unemployment in the area
resulting in the largest major fish processing and canning capability in the area.

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Multi Subject Assessment - 2

The Fish Processing Division is situated near the Karachi Fish Harbour and its relatively low prices have
made it attractive to many fishing companies. Fish processing is manually intensive as the processing
machinery, which continues to operate well, has been unchanged since the division was acquired. The
division has its own fleet of trucks which it uses to collect fish from the Fishing Division and deliver
processed fish products to wholesalers, supermarkets, the Fish Restaurant Division and other
restaurants in Pakistan.
The Fish Restaurant Division
The 'Karachi Fish Diner' chain of restaurants was founded nearly eight years ago. The chain enjoyed
early success as it quickly became a fashionable place to eat with its range of high quality, healthy fish
meals in a modern setting. Much of Karachi Fish Diner's success was built on the quality of its food and
service. There are now 20 large Karachi Fish Diner restaurants across Pakistan. The menus contain a
wide range of dishes which haven't changed and have remained popular since the restaurants were first
launched.
In the past two years, the financial performance of Karachi Fish Diners has declined although the
reasons for this are not yet fully understood by the management. At a recent meeting one of the
employees called for new restaurant managers who can change with the times and effectively manage
staff.
The Fish Restaurant Division currently buys half of its fish products from the other two divisions and the
rest from local wholesalers. The Board of FFC want to see a significant change at the Fish Restaurant
Division so that it can return to profitability as soon as possible.
Recent divisional performance in the year to September
Fishing Division 2018 2017
Turnover of market sector (Rs. in million) 24,950 23,750
Turnover of the Fishing Division (Rs. in million) 2,940 2,688
*Divisional gross profit (Rs. in million) 138 131
Divisional volume of fish caught and farmed (tonnes) 53,400 52,125
Number of divisional fishing vessels 202 200
Fish Processing Division Turnover of market sector (Rs. in million) 5,580 5,100
Turnover of the Fish Processing Division (Rs. in million) 2,212 2,065
*Divisional gross profit (Rs. in million) 194 218
Divisional volume of fish processed (tonnes) 32,040 31,850
Restaurant Division Divisional turnover (Rs. in million) 7,388 7,677
*Divisional gross profit (loss) (Rs. in million) (700) (628)
No. of divisional restaurants 20 20
Average number of meals served by the Restaurant Division per day 7,768 8,340
*All inter-divisional sales are made at arm’s length

Requirements
(a) Assess the performance of the three divisions in FFC. Your assessment should include a strategic
recommendation for each division.
(b) Advise on the required actions necessary to achieve a turnaround of the Fish Restaurant division.
(c) Advise how value can be added at FFC in the following areas:
i. Use of new technology
ii. Customer relationship management
iii. Use of specific key performance indicators
iv. Creation of a shared service centre

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 Questions

3 TECHCON LTD
Techcon Limited (Techcon) is a listed Karachi based company which manufactures a small portfolio of
leading-edge technology products. It was founded in 2003 by Salman Umar, who started his career with
a large technology company but quickly became impatient with their processes and wanted to start up
on his own. The company grew rapidly. It quickly became admired for its innovation and dynamism, and
it floated on the Pakistan Stock Exchange in 2014. The company is now mostly owned by financial
institutions, although Salman still owns 15% of the company and other employees own approximately
10%. Salman continues to be CEO and Chairman of the company. Financial results have been
improving, but the company has not yet made a profit and some shareholders are becoming impatient.
CEO behaviour
Salman is a visionary businessman and known for pushing himself and his employees to excel. He has
a high media profile, spending his wealth on luxury cars, yachts and homes. He uses social media
extensively and has over 500,000 followers on Twitter and Instagram. He regularly posts personal
information, business updates and opinions about current issues.
In recent months, the board of directors and shareholders have become increasingly concerned about
Salman's erratic behaviour, including his criticism of celebrities and a meeting he held with key
shareholders where he lost his temper and walked out after a shareholder criticised the performance of
the company. At one point he was criticised for arriving late to an awards ceremony and commented on
social media:
'I was using my own satnav (navigation device), so of course I got lost and was late! Ha-ha!'
He later insisted it was intended as a joke, but he was heavily criticised by employees, shareholders
and the public on social media for damaging the reputation of Techcon's products.
A week later, on 22 October 2018, there was a traffic accident in Lahore and the driver, who was injured,
blamed his Techcon satnav for directing him into a one-way street the wrong way. Following on from
Salman's earlier flippant social media remark, the driver's claim received extensive publicity – Appendix
1 is an example of media report. An extract from the board minutes following the accident is provided in
Appendix 2.
Requirements
Assume the date today is 30 October 2018.
(a) Explain the ethical and commercial implications of the CEO's behaviour and the accident
(Appendix 1)
(b) Using the information above and board minutes (Appendix 2), advise the board of directors on
specific improvements that should be made to the governance of Techcon Limited.
Subsequent developments
Two months after the traffic accident, Techcon announced that Salman Umar would be stepping down
as their CEO and Chairman, although he would remain on the Board of Directors as he is a key
shareholder. A new interim Chairman was appointed and his first task was to oversee the recruitment
of a new CEO. The Nomination Committee drew up a draft person specification (summarised in
Appendix 3) and began to review the Curriculum Vitaes (CVs) of potential candidates (two CVs are
provided in Appendix 4).
You are a consultant in GFD & Company. Following the traffic accident, your manager has asked you
to draft sections of a report to the client.
Requirement
(c) Identify any additional requirements that should be included in the person specification for the
CEO’s role (Appendix 3). Provide a preliminary recommendation, with reasons, as to which of the
two candidates (Appendix 4) you would recommend to be the new CEO.

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Multi Subject Assessment - 2

APPENDIX 1 – 'DAILY NEWS' REPORT

Techcon boss in further trouble after accident
Not so long ago, Techcon was one of the fastest rising shares in the market and its founder and CEO,
Salman Umar, is a high-profile figure in Pakistan. However, several recent incidents have called into
question his professional judgement, especially that famous remark on social media about his own
satnav products. He protests that it was a joke, but staff and customers didn't find it at all humorous.
And now it's only getting worse. Last night in Lahore a man named Adeel Iqbal was involved in a collision
with a lorry as he was going the wrong way down a one-way street, breaking his arm and collarbone.
No one else was hurt in the incident. From hospital, Adeel told our reporter that his Techcon satnav had
clearly directed him to turn into the road and travel down it the wrong way, commenting 'Even the CEO
admits the Techcon satnav doesn't work and now it has caused real injuries to me.'
APPENDIX 2 – EXTRACTS FROM TECHCON LIMITED BOARD MINUTES
Date: 29 October 2018
Attending:
Executive Board Non-executive Board
Salman Umar (SU, CEO and Chairman) Non-executive Director 1 (NED1), representing
Finance Director (FD) Techcon's largest external shareholder.
Marketing & Sales Director (MSD) Non-executive Director 2 (NED2), CEO of a well-
established oil company.
IT Director (ITD) (taking minutes in the
absence of the Company Secretary) Non-executive Director 3 (NED3), Salman's
brother, a major shareholder in Techcon and CEO
of a large retailer.

Apologies for absence: Company Secretary (CS), Operations Director (OD), HR Director (HRD).

Minutes:
1. The board approved the minutes of last meeting of the board held on 4 April 2018.
2. NED1 requested an update on the incident where a driver blamed his Techcon satnav for a collision.
SU assured the Board that no technical problems had ever occurred with satnavs in use and he
was certain the driver's claim was without foundation. He intended to vigorously resist any legal
claim resulting from the accident.
MSD expressed the view that recent incidents may cause some damage to the Techcon brand, and
this was discussed. SU strongly disagreed with this view, saying that he believed the brand was
stronger than ever, and helped by his growing profile in the press and on social media. This was
partly due to the work of a branding consultancy, which has been hired a month ago to improve the
profile of the business. MSD said that she was not aware of these consultants being retained and
SU explained that the consultants were not expensive and therefore, to avoid delays, he himself
had taken the decision to hire them.
NED2 was concerned about the allegation that Techcon products may be faulty and in some cases
this may endanger safety. As Chairman of the audit committee, he expressed the view that the
internal audit function should review the controls around quality and safety testing as a matter of
urgency. SU said that as the allegations were without foundation this was not necessary and that it
was a higher priority for internal audit to review the product development process, as product
innovation was the most critical area of focus for the company as a whole.

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 Questions

APPENDIX 3 – DRAFT PERSON SPECIFICATION FOR CHIEF EXECUTIVE OFFICER

Essential attributes
 Significant experience at senior management level, ideally as a CEO, including strategic
planning and financial management
 Experience of managing in a fast-growing environment
 Experience of managing relationships with shareholders, suppliers and other key stakeholders
 Understanding of the technology industry and leading-edge technology developments
 Experience of representing an organisation publicly to the media
 Strong presentation and communication skills
 Educated to degree level or equivalent
Desirable attributes
 Advanced degree in a technology-related field and/or management
 Senior management experience within the technology industry
APPENDIX 4 – SUMMARISED CVS OF TWO CANDIDATES

Candidate A
Professional Qualifications and Experience
 Chief Executive Officer of DYJ, the largest
provider of IT strategies and solutions in
Pakistan, 2015–present
 Finance Director of DYJ, 2010–2015
 Qualified accountant and MBA
Experience and duties
 Developing and executing strategy to
maximise financial returns for DYJ's
private equity owners
 Developing new talent management
strategy and processes focused on
attracting and retaining the best staff
 Leading the development of new and
improved services to offer to corporate
clients
 Producing regular presentations to Board
members to keep them updated and
fostering critical discussions
Key skills and competencies
 Inspiring and leading a talented team to
deliver excellent service and innovative
solutions to a range of corporate clients
 Strong vision and strategic capability
 Ability to develop strong relationships with
key clients and influencers
 Experience of managing complex
projects in a changing organisation
 Highly effective interpersonal and
communication skills
 Excellent financial and commercial
management skills
Candidate B
Professional Qualifications and Experience
 Chief Executive Officer of Ama.pk, a
fast-growing e-commerce business, 2013–
present
 Chief Operating Officer of Ama.pk, 2010–2013
 Senior Vice-President for Strategic Planning
of DB Limited, a media company, 2005–2010
Experience and duties
 Driving strategy and vision in a fast- changing
market
 As CEO, led growth of 300% in turnover and
successful floatation on the Stock Exchange in
2015
 Improving focus on controls and efficiency in a
fast-growing business
 Identifying and hiring a strong senior
management team
 Managing relationships with shareholders, the
media and other key stakeholders
Key skills and competencies
 Commitment to put the customer at the centre
of everything and driving world- class service
 Proven record of managing a successful, fast-
growing business
 Successfully managed the cultural,
operational and management changes
required in taking a business public
 A charismatic leader able to inspire confidence
and communicate direction to a range of
stakeholders
 Enterprising and creative thinker, with a talent
for seeing and exploiting commercial
opportunities

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Multi Subject Assessment - 2

Additional Practice Questions 10 The Institute of Chartered Accountants of Pakistan

 Multi Subject Assessment - 2

B
Management professional competence

SECTION
Answers

1 LAHORE WORLD TRAVEL LTD

Part (a)

Tutorial notes
This requirement is not very complex, however, identification of correct performance analysis ratios is
very important to ensure that maximum marks would be awarded. Here, students should clearly
identify Profit Margins and Return on Capital Employed (ROCE) as performance measure KPIs based
on the information provided in the question. Based on the calculations, discussions are also required
to critically evaluate the potential acquisition. Students are expected to use numerical figures to
support their arguments. There is another requirement of this part is to comment on advantages/
disadvantages of potential acquisition. Students are expected to consider the information provided in
the question while describing advantages/ disadvantages. The answer should be balanced among
advantages and disadvantages. At the end, brief conclusion is also expected to finalize this
requirement.

Safari Safari
Adventure Adventure
2018 Performance analysis LWT 2018 LWT 2017 plc 2018 plc 2017

Rs millions Rs millions £ millions £ millions

Revenue 11,892 11,458 21.5 20.0

Profit after tax for the year to 30 June 2,200 2,160 4.4 4.1
2018

Revenue Growth (%) 3.8% 7.5%

Profit Margin (%) 18.5% 18.9% 20.5% 20.5%

Total Market Capitalisation

(Value of equity and debt) 30,000 (W1) 30,000 50.0 (W2) 50.0

Return on Capital Employed (%) 7.3% 7.2% 8.8% 8.2%

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Multi Subject Assessment - 2

Workings
1 LWT – 40 million shares  500 Rs + Rs 10,000 million (debt)
2 Safari Adventure plc – 20 million shares  £2.50
Revenue
LWT revenue growth in 2018 of 3.8% is significantly below Safari revenue growth of 7.5%, suggesting
that the board of directors are correct that growth is slower than Safari in their core travel areas of luxury
and corporate travel. However, LWT does not advertise and has no clear marketing strategy, so they
could be losing ground to new competitors, which they are unaware of. Therefore LWT may consider
investing in marketing to boost existing growth instead of an acquisition strategy at this point. LWT's
performance reporting is limited and there is no evidence of competitor benchmarking. Recent growth in
Safari is consistent with the 8% increase in customers indicated by the Safari director. However,
sustainability of future growth is unclear as growth will be limited to three sites and hotel room capacity
at these sites, and LWT currently knows little about the safari market.
Profit Margin
LWTs profit margin has fallen slightly by 0.4% to 18.5% which suggests either further discounting to
achieve revenue targets or rising costs have not been passed on to customers in pricing. LWT lacks the
detailed management reporting to understand the reasons for the fall in margin and an improvement in
management reporting is advised to better understand the business and control cost. An acquisition at
this time may be a distraction for senior management when there are reporting issues to address. The
profit margin at Safari is 2% higher at 20.5%. However, it is unknown if this additional margin is sufficient
to compensate for the additional risk of operating safari parks situated outside Pakistan.
Return on capital employed (ROCE)
Based on current equity and debt values, Safari Adventure plc offers a similar ROCE at 8.8% vs 7.3%
generated by LWT in 2018. However, if LWT agree pay Safari a premium above the current share price
then Safari's 8.8% ROCE will reduce as the capital employed rises and it could fall below LWT's current
ROCE of 7.3% which may not be acceptable.
Advantages of acquiring Safari Adventure plc
 If the current Pakistan travel market is stagnating then acquiring a well-established, successful
travel company with a proven track record in overseas markets and growth potential will aid
LWT's strategic objective of achieving growth.
 The acquisition of a safari business is strategically aligned with LWT's core markets as the luxury
travel and corporate travel market could be cross-sold luxury safari holidays.
 Diversification benefits may add value as LWT learns from Safari adding value to existing LWT
operations, and LWT's customer service excellence could add value at Safari.
Disadvantages of acquiring Safari Adventure plc
 The acquisition risks are significant as LWT has no experience running hotels or safari parks so
LWT would need to ensure sufficient existing knowledge and experience remains in Safari post
acquisition. LWT may have to incentivise some key employees to remain.
 Political conditions of location of Safari parks need to be evaluated carefully as LWT risks
significant losses if political change prevents visitors from obtaining travel visas or it becomes
unsafe for customers to visit. Furthermore, changes in regulation, conservation or use of land
could make the operation of safari parks more challenging or costly to operate. These factors
could reduce bookings or impact on reputation.
 LWT already highly geared and servicing interest on further debt could be difficult. Less risky
opportunities should also be considered such as for developing existing markets further by
funding a new marketing strategy.
 Land and development restrictions may prevent expansion of visitor accommodation which will
restrict future growth.

Additional Practice Questions 12 The Institute of Chartered Accountants of Pakistan

 Answers

Conclusion
The advantages of acquiring Safari mean the acquisition warrants further investigation. However, a major
concern is that the risks identified are too high for the potential margin of 20.5% and ROCE of 8.8% as
these are only marginally higher than LWT is currently generating on its existing travel agency business.
This suggests further market development of the luxury and corporate travel markets could be a preferred
strategic alternative that is worth further investigation.
Part (b)

Tutorial notes
The numerical calculation is not very tricky but time management is a key to secure maximum marks
in this requirement as very solid commentary regarding advice to the board (based on numerical
calculations) is expected from students followed by the conclusion. Hence, it is very important to
complete the calculation in time so that adequate time would be available for second part of this
requirement i.e. advice to the board. Numerical calculations are not very complex, however, there are
few complicated areas to handle i.e. the loan value should be deducted to determine the value of
combined shares only. Students should clearly mention all the assumptions and critically comments on
its sensitivity as well.

Part (b)
Free cash flow valuation of a combined group

Year 6 and
Year 1 Year 2 Year 3 Year 4 Year 5
onwards
Lahore World Travel Ltd
(Rs millions) 2,500 2,700 2,900 3,000 3,100
Safari Adventure plc
(£ millions) 5.0 5.2 5.4 5.5 5.5
Safari Adventure plc
(Rs millions) at Rs 150 : £1 750 780 810 825 825
Revenue synergy
(Rs millions) 150 150 150 150 150
Sale of surplus land
(Rs millions) 500
Total 3,900 3,630 3,860 3,975 4,075
Perpetuity year 6 onwards 45,278
(4,075/0.09)
Total free cash flows for the
combined group 3,900 3,630 3,860 3,975 4,075 45,278
Discount Factor 9% 0.917 0.842 0.772 0.708 0.650 0.650
Present Value (PV) 3,576 3,056 2,980 2,814 2,649 29,431

Total Market Capitalisation for the 44,506 The total PV represents the value of Equity and
combined group of LWT & Safari the value of debt in the new combined group
Less: existing LWT loans (10,000) The loan be deducted to determine the value of
shares only
Value of Equity in new combined 34,506
group
Current equity value of LWT only (20,000) 40 million shares at Rs 500 each

Additional Practice Questions 13 The Institute of Chartered Accountants of Pakistan

Multi Subject Assessment - 2

Maximum price for Safari 14,506 This represents the shareholder value if Safari
Adventure plc was added to LWT, so it's the maximum LWT
should pay.

Advice to the Board

A maximum value of Rs 14,506 million suggests the offer price of Rs 9,000 million would generate Rs
5,506 million in value on acquisition. However, this significantly relies on the following:
(1) All forecast assumptions are valid. This may not be case as:
 The assumed growth in the cash flows may be unachievable if there is a reduction in
consumer interest in safari holidays, barriers preventing the acquisition of additional safari
sites or issues increasing existing hotel capacity.
 Despite Adeena's optimism, revenue synergy of Rs 150 million from existing LWT
customers may not be realised.
 It may not be possible to sell land in Malawi for Rs 500 million for development as this may
be restricted under a government preservation order. Also, this land may be essential to
safari operations by providing a habitat for existing wildlife.
 The assumption that the exchange remains constant at Rs 150 : £1 may not hold.
(2) The required return of 9% is acceptable to shareholders based on the risk of the new venture.
 Running an overseas safari parks in Africa is riskier than LWT's current operations,
particularly as LWT rely on the retaining local management experience and stabilise
political conditions of Africa region. It is likely the required return will need to be higher. It is
suggested LWT must re-evaluate the required return for this acquisition.
Conclusion
The acquisition does have its merits, and therefore we advise the acquisition is considered further subject
to the satisfactory completion of due diligence. As Safari Adventures plc clearly intends to sell then this
provides an opportunity for LWT to negotiate a lower price. A price closer to the current share price of Rs
7,500 million (20 million  £2.5  Rs 150 : £1) may be acceptable and will provide a greater return to LWT
for the risks identified.
Part (c)

Tutorial notes
This requirement is highly time pressured as many calculations are required to determine required
ratios under both financing options. After calculations, students are also expected to use this
information and provide recommendation to the Board of Directors regarding financing option. Efficient
planning is key to secure maximum marks in this requirement as calculations are not very complex.
Students should be able to save time for discussions and recommendations. Students are expected to
mention notes to the assumptions while performing calculations. Recommendations should be
balanced covering maximum ratios calculated in the requirement. Since, calculations are based on
many assumptions, it is expected that due diligence should activity should be recommended in the end.

Part (c)

Current position LWT Safari Adventure Comments

Profit after tax in 2018 2,200 660 £4.4m  Rs 150 : £1 =
(Rs millions) Rs 660
Current value of equity 20,000 (40m  7,500
(Rs millions) Rs 500) (20m  £2.5  Rs 150 : £1)
Current value of debt 10,000 – Using book value
EPS (Rs per share) 55 33
Gearing 33.3% 0.0% Measured as
debt/(debt + equity)

Additional Practice Questions 14 The Institute of Chartered Accountants of Pakistan

 Answers

After acquisition position Financed by Financed by a

New Debt share for share
exchange
Combined group profit after tax 3,400 3,400 From part (b) – Rs 3,900
in 2019 (Rs millions) million –
Rs 500 million for sale of
surplus land. Reasonable to
assume
free cash flow is equivalent
to profit after tax.
Additional post tax loan interest (540) N/a New loan of Rs 9,000 million
at 6% (Rs millions)  0.06
Revised group profit after tax
2,860 3,400
(Rs millions)
One-for-one share exchange
20 million new LWT shares
issued to Safari Adventure
plc shareholders replacing
Number of LWT shares
40 60 (40 + 20) 20 million Safari shares.
(millions)
This will result in the existing
shareholder's ownership in
LWT reducing from 100% to
66.6% (40m/60m).
Earnings per share (Rs) 71.5 56.7
Combined Value of Equity (Rs
Millions) 34,506 34,506 From Part (b)
Value of Debt 10,000 + 9,000
(Rs millions) = 19,000 10,000
Gearing 35.5% 22.5% Measured debt/debt + equity
Impact of funding decision
This analysis assumes LWT pay the price of Rs 9 million for Safari Adventure plc.
Control and gearing
An acquisition with cash is preferred as existing LWT shareholder retain 100% control. However, credit
availability to arrange a further loan may not be available to LWT from its existing or other banks.
Furthermore, existing shareholders may consider the financial risk of increased gearing to 35.5% be
unacceptably high. However, this may not be a problem as this is largely unchanged.
The impact on working capital cash flow may be a greater problem as borrowing Rs 9,000 million at 6%
will mean an additional Rs 540 million of interest must be paid annually and this may be difficult to
service in the early years of acquisition where capital investment in the new venture is likely to be
required. Also, it is possible that existing Rs. 10,000 million loan will have used available security,
making an additional Rs. 9,000 million loan unsecured. Therefore a higher rate of interest on the loan
may ultimately be charged.
A share-for-share exchange will reduce gearing from 33% to 22.5%. However, the terms of one LWT
share for one Safari share is generous as it values the Safari at Rs 11,500 million
(Rs 34,506 million  33% ownership) which is Rs 2,500 million above the offer price of Rs 9,000 million.
Earnings per Share (EPS)
Both financing methods predict an increased in EPS from Rs 55 in 2018 to Rs 71.5 if financed by debt
and Rs 56.7 if financed by equity. The debt option is more attractive as the profit is retained by LWT's
existing shareholders.

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Multi Subject Assessment - 2

Conclusion
Debt finance is cheaper than the equity finance option and it maximises post acquisition EPS at Rs
71.5.
However, LWTs current gearing of 33.3% may be considered high and therefore shareholders may not
be comfortable with additional borrowing, particularly as LWT had problems integrating the Lux Travel
subsidiary four years ago. New acquisitions tend to demand cash investment in the early years, so it
may be difficult for LWT to meet the annual interest and capital repayments on Rs 19,000 million of
loans in the early years post-acquisition.
It is recommended that LWT discuss additional borrowing with the banks, to confirm credit availability,
and with shareholders to confirm they will support higher borrowing at Rs 19,000 million. Detailed
forecasts are recommended to confirm that LWT can service the annual interest at this level of debt and
only proceed with further borrowing subject to securing confirmation of loan affordability.
If debt finance is not affordable or acceptable to LWT shareholders then an acquisition financed with a
share-for share exchange is recommended. However, it is recommended that revised share for share
terms are negotiated so LWT minimises the dilution of ownership to its existing shareholders.
Proceeding with an offer under either finance arrangement is subject to satisfactory completion of due
diligence procedures.
Part (d)

Tutorial notes
Here, students are advised to consider key strategic areas of Safari Adventure plc. Careful reading of
questions is key to secure maximum marks in this requirement as students are expected to use
maximum information given in the questions to answer this requirement, for example, safari sites
ownership, operations and forecast assumptions.

Part (d)
The following are key areas that should be examined during a due diligence process which must be
completed prior to finalising the decision to purchase Safari Adventure plc. The due diligence exercise
could affect the purchase decision, valuation or offer price.
Site Ownership, and restrictions on land use or land sale
 Confirm that Safari owns all three safari sites by reviewing ownership deeds and confirm any
restrictions on the use of land, such as sale rights or development rights as this may prohibit the
sale of land in Malawi which is assumed in the valuation.
 A buyer for the 2019 sale of the Malawi land of Rs 500 million should ideally be found and
confirmation should be obtained that this sale will not impede operations in any way at the Malawi
site.
Operations, key management and employees
 An LWT representative should visit each site to confirm it exists as described, it is currently
operational with guests and safaris taking place, and detailed operational checks should be
completed to ensure each safari site operates as described by Safari Adventure plc.
 LWT have no experience in running hotels or safari parks so key talent in both management and
operations should be identified by obtaining a list of staff, roles and responsibilities, experience
and performance reports. This will allow LWT to plan for the retention of key staff post
acquisition.
Industry and political outlook in Malawi and Botswana
 Political analysis and expert advice should be sought to understand the risk to
foreign-owned commercial operations from political change or unrest.
 A review of the safari park industry should be conducted for legal and regulatory compliance, and
ethical requirements to identify areas of non-compliance. The directors will need to evaluate the
significance of these on the acquisition.

Additional Practice Questions 16 The Institute of Chartered Accountants of Pakistan

 Answers

Financial history, position and forecast assumptions

 Evidence of the pipeline of future safari bookings for the next year to confirm the feasibility of
forecast growth assumption.
 Compare hotel capacity and past occupancy data with growth assumptions to confirm that growth
forecasts are reasonable.
 A detailed forecast profit and loss should be compared with actual revenue for the five months
and the costs to identify potentially understated or missing costs in the forecasts.
 LWT should review the board minutes of Safari Adventure plc and interview key directors to
understand the reasons why the company is being sold.
Commitments, contingencies and legal claims
 Information about past and ongoing legal claims should be discussed with Safari's legal advisors
to identify potential additional costs or actions which may result in park closures or operational
issues.
Part (e)

Tutorial notes
Here, students are advised to invest some time in efficient planning to avoid writing too much and
writing such information which is not required. Only relevant information from Section 109A, 59AA,
59B, 28 of the Income Tax Ordinance, 2001 is required to address the requirements of this section.
As the answer is required in a note form so it should be structured accordingly.

Note to the board of directors

I have evaluated all the three matters and my advice on each matter is as follows:
Viewpoint of Mr. Shahbaz Karim
Controlled Foreign Company (CFC)
Mr. Shahbaz Karim correctly identifies that the concept of CFC has been introduced through Section
109A of the Income Tax Ordinance, 2001. Under this section, a company is considered as CFC only
when it meets all the four requirements mentioned in this section. One of the requirements is that the
shares of the company are not traded on any stock exchange which is recognized by the law of the
country in which the company is resident for the tax purposes. Since SA is listed on London Stock
Exchange, it would not be considered as CFC.
Group taxation
Under section 59AA of the Income Tax Ordinance 2001, group taxation is restricted to companies locally
incorporated under the Companies Ordinance 1984. Therefore, the option mentioned by the director
would not be available to LWT.
Treatment of dividends to be received from SA
Under Section 5 read with the First Schedule, 15% tax shall be imposed on LWT when it would receive
dividend from SA. The tax imposed shall be considered as final tax on the amount of dividend and:
(i) no deduction shall be allowable for any expenditure incurred in deriving the amount of dividend;
(ii) the amount of dividend shall not be reduced by any deductible amount or set off of any loss;
(iii) tax payable by LWT on dividend shall not be reduced by any tax credits.
Financing option considering by LWT
Option 1: Borrow and acquire with Cash
Under section 28 of ITO 2001, LWT would be allowed to claim a deduction for any interest on loan
incurred.
Option 2: Acquire with a share for share exchange
No tax implications as acquisition of a foreign subsidiary would not attract any group taxation (Section
59AA) or group relief (Section 59B).

Additional Practice Questions 17 The Institute of Chartered Accountants of Pakistan

Multi Subject Assessment - 2

2 THE FRESH FISH COMPANY

(a) The Fishing Division

Tutorial notes
The requirement asks for the performance assessment of three divisions. Here, students need to plan
to identify and discuss the most important areas which reflect the performance of the division. Given
there are 15 marks available, a split of 5 marks for each division would be reasonable assumption.
Time management is absolutely essential to ensure coverage of all available marks. It is vital that
students use the numerical evidence in their strategic recommendations which gives their answers
professional credibility and help them to ensure maximum marks.

2018 2017 Change %

Turnover of market sector (Rs million) 24,950 23,750 1,200 5.1%

Turnover of the Fishing Division (Rs million) 2,940 2,688 252 9.4%

Market share 11.8% 11.3% 0.5%

Gross profit (Rs million) 138 131 7 5.3%

Volume of fish caught and farmed (tonnes) 53,400 52,125 1,275 2.4%

No of fishing vessels 202 200 2 1.0%

The Fishing Division accounts for 11.8% of the Pakistan fishing market, which is consistent with its fleet
size of 10% of fishing vessels operating in the Karachi Harbour. Despite evidence of falling fish stocks,
the value of the market is growing due to the increasing price of fish. A 1% increase in the number of
fishing vessels in 2018 to 202 and a secure supply of fish from fish farms account for the Fishing Division's
increasing market share from 11.3% to 11.8%.
Turnover has increased by 9.4%, which is higher than the 2.4% increase in fish caught and farmed. This
suggest the wholesale price of fish is increasing. This may well be because supplies are constrained by
government fishing quotas.
Gross profit has increased 5.3% to Rs 138 million which is not in line with growth in turnover, suggesting
ineffective divisional cost control.
The Fishing Division is strategically important as a supplier to both the Fish Processing Division and the
Fish Restaurant Division. With only 11.8% market share, further expansion of the fishing fleet is feasible
by purchasing further boats or removing competition by competitor acquisition which will provide further
growth as the popularity of fish with consumers is unlikely to decrease. Currently, 50% of fish is sold to
Fish processing division so there is potential for growth by increasing the proportion of fish sold to the
Fish Processing Division and Restaurant Divsion, whilst maintaining its current external customers.
Fishing capacity may be further increased by expanding its fish farms.
The Fish Processing Division
2018 2017 Change %
Turnover of market sector (Rs million) 5,580 5,100 480 9.4%
Turnover of The Fish Processing
Division (Rs million) 2,212 2,065 147 7.1%
Market Share 39.6% 40.5% 0.9%
Gross profit (Rs million) 194 218 (24) (11.0)%
Volume of fish processed (tonnes) 32,040 31,850 190 0.6%

Additional Practice Questions 18 The Institute of Chartered Accountants of Pakistan

 Answers

The Fish Processing Division holds 39.6% of market share and is likely to be the market leader although
its share has decreased slightly by 0.9% which suggests increasing competition. A significant percentage
of its fish is provided by The Fishing Division although the majority of fish processing is under contract
with other companies.
It is a profitable division with an increase in turnover of 7.1%. The volume of fish processed in 2018 has
only increased by 0.6% as the market price for processed fish products is increasing as processing
volumes are static. This may also suggest that the division is near capacity as its machinery and manually
intensive processing methods are unchanged since acquisition 20 years ago.
Gross profit is disappointingly flat at Rs 194 million despite a 7.1% increase in turnover which suggests
the division is dealing with possible cost control challenges.
The Fish Processing Division could potentially be a more profitable division of the Karachi Fishing
Company as the price and popularity of processed fish products increases. One possible growth area is
negotiating with the Fishing Division to process more of its fish, subject to capacity. This arrangement
should benefit the profit of both divisions as processing business is diverted from competitors.
The Fish Processing Division could also look at increasing processing capacity by introducing modern
machinery, expansion at its processing site or through acquisition of other small fish processing
companies.
The Fish Restaurant Division

2018 2017 Change %

Turnover (Rs million) 7,388 7,677 (289) (3.8%)
Gross profit (loss) (Rs million) (700) (628) (72) (11.5)%
No of restaurants 20 20 – 0%
Average number of meals served by the
Restaurant Division per day 7,768 8,340 (572) (6.9%)

The Fish Restaurant Division is the most recent addition to the Karachi Fishing Company group and is
now a significant contributor to group revenue with Rs 7.4 million in 2018.
However, the average number of meals served per day has fallen by 6.9% in 2018 suggesting operational
problems or falling consumer interest. Revenue has fallen by 3.8% suggesting the division has been
protected to a degree by price increases in its restaurants. One factor could be the menu has not changed
since the diners launched eight years ago and an increase in menu prices could be causing some
customers to eat elsewhere. Other contributing factors could be a decline in meal quality or service, new
competition or changing consumer food tastes and further market research is advised.
The division's gross loss has increased by 11.5% to Rs 700 million, which is significant. However, it is not
unusual for restaurant chains to turnaround to profit as they find their optimum operating model.
The Fish Restaurant Division has the potential to be a more significant division if it can turnaround, return
to profit and expand the Karachi Fish Diner brand both in Pakistan and overseas by marketing the appeal
of a fresh, high quality and delicious fish-based menu.
Therefore, the Karachi Food Company must consider whether to avoid the risk of further losses by
divesting the Fish Restaurant Division now and focus on growth in the other divisions, or to implement a
turnaround strategy and provide further investment to allow the Restaurant Division to expand. The
demand for dining out is likely to rise as the population in Pakistan becomes more affluent as the economy
grows.
Conclusion
The Fishing Division and Processing Division both have growth potential and should be retained. The
Restaurant Division will need to demonstrate a credible turnaround plan and business case to ensure the
retention of this division is worthwhile.

Additional Practice Questions 19 The Institute of Chartered Accountants of Pakistan

Multi Subject Assessment - 2

Part (b)

Tutorial notes
To answer the requirement of this section, students are expected to use practical knowledge while
discussing turnaround action plans i.e. enhancing quality / customers’ experience, reducing costs,
performance monitoring and customer feedback. Each logical action plan would secure 1 mark. It is
very important that focus should remain on turnaround and performance of this particular division.

The Karachi Fish Diner chain of restaurants are loss making and customer volume is reducing. A strategic
turnaround is required to be implemented quickly and should focus on getting the existing business right
before any new restaurant sites are considered. The following points would be vital to a successful
turnaround strategy.
 Leadership – The eventual success of a turnaround strategy will depend on the divisions ability
to prioritise necessary activities and to deliver fast, significant improvements. Therefore, a
change leader should be appointed who is empowered to deliver the turnaround programme and
report regularly on progress. This could include a series of workshops to consult with
management and employees to create a compelling strategic vision.
 Brand and customer feedback – The Karachi Fish Diners have a strong brand and reputation for
being fashionable and serving fresh quality meals. However, it is vital that management
understand precisely why customers are choosing to eat elsewhere through gathering customer
feedback and using the results to identify changes. Such changes may include, for example, staff
training to improve service or updating the menu to reflect more contemporary tastes. The
division may need to refresh and relaunch the 'Karachi Fish Diner' brand as a result.
 Menus and options – The restaurants offer too many meal options, which is expensive to operate
and can increase food waste. The range of menu options should be reduced to include only its
most popular items and trial new meals based on customer feedback.
 Pricing and promotion – Management should complete a benchmarking review of competitor
restaurants to understand areas of competitive weakness. For example, management should
consider reducing its meal prices if evidence suggests its restaurant pricing is too high. An
increase in customer bookings may offset this price decrease. Short-term offers such as 'meal of
the day' or promotional discounts could attract new customers, but care must be taken not to
devalue the brand.
 Cost control – Improving employee productivity and reducing non-essential costs is necessary to
limit current losses. In reducing costs, it is vital that the brand is not compromised. Interdivisional
pricing and decision making could be updated to avoid competitors being chosen over the Fish
Processing Division.
 Key performance reporting – it is unclear whether the performance of each restaurant is analysed
separately against targets or against each other. The worse 25% performing restaurants should
be identified for a turnaround focus, with the possibility of changing restaurant management on
evidence this is major contributing factor as indicated by recent employee comments regarding
poor management. Poorly performing restaurants could be closed where it is clear a turnaround
strategy will not work.
Part (c)

Tutorial notes
This requirement is highly time pressured. Efficient planning and use of practical knowledge is essential
to secure maximum marks. A complete value chain of the business should be analyzed to identify those
areas where new technology could be leveraged to make processes more efficient. The benefit of CRM
would be two fold i.e. enhance customer experience and maintain optimal inventory levels. For KPIs,
students are expected to identify at least one KPI from each division and briefly discuss how it would
help to improve the business. While discussing shared service centre, cost reduction is critical to
mention. Further, processes would be leaner under shared service centre.

Additional Practice Questions 20 The Institute of Chartered Accountants of Pakistan

 Answers

New Technology
With a fresh product such as fish, it is essential that the product is transported to processing sites,
wholesalers and restaurants as quickly as possible. An integrated customer order and logistics system
can optimise delivery routes to customers which reduces the risk of fish becoming spoiled. Additionally,
planned fishing activity can be linked to seasonal demand which avoids unnecessary fishing and wastage
in low demand periods. A logistics system can aid the planning of third-party fishing vessels at peak times
which will reduce the size and cost of a permanent fleet.
Updating the fish processing plants (including for example increased automation) will improve plant
efficiency, improve processing capacity at existing sites and reduce the number of plant operatives if the
process is less manually intensive.
In the restaurant division, an online booking system will make it easier for customers to book and will also
provide customer data which can be used for marketing communications, such as the launch of new
seasonal menus and other promotional offers.
Customer relationship management (CRM)
A CRM system can keep a record of all customer interactions and analyse previous orders which will
highlight trends in demand and types of fish requested. The fishing of particular varieties, such as shrimp
or tuna, can be flexed to customer needs. This will avoid the over-fishing of stocks which cannot be sold
and will allow better planning of fish varieties and volumes in fish farms.
Key performance indicators
Key performance indicators can improve margins by facilitating faster decision making or providing early
indicators of operational problems. Examples may include:
 Fishing division – % waste compared to target can be monitored so the fishing fleet can target
on catching fish which are only in demand by customers.
 Processing division – Time to process per tonne, or unused capacity can be monitored to
improve efficiency which will reduce costs. Performance monitoring will identify regular times of
low utilisation. In such times, lower processing charges can be offered to external customers to
utilise spare capacity and free up busier times.
 Restaurant division – The use of customer surveys will allow the division to react to adverse
feedback. Customer complaints and time to serve a meal can also be monitored to understand
and improve the dining experience which will encourage new and returning customers through
better customer reviews.
Shared service centre
Services such as invoicing, procurement, management reporting and logistics can be provided by a single
centralised service centre which can free up management time to focus on specific divisional issues,
customer relationships, revenue growth strategies and operational efficiency.
The shared use of resources and competencies can reduce costs and create value by removing duplicate
processes in each division and improve the efficiency and quality of the shared service.

Additional Practice Questions 21 The Institute of Chartered Accountants of Pakistan

Multi Subject Assessment - 2

3 TECHCON LTD
Part (a)

Tutorial notes
There are two parts of this requirement i.e. ethical and commercial implications. For ethical implications,
students should have good knowledge of Code of Corporate Governance Regulations, 2017 to
augment their comments regarding ethical concerns raised due to CEO’s behavior. For commercial
implications, students should use practical knowledge to answer the requirement i.e. bad reputation,
decline in share price, possible difficulties in raising finances and litigations issues.

Ethics
The behaviour of the CEO raises several significant ethical concerns. It should be considered against the
requirement of the 2017 Code of Corporate Governance Regulations, which states that:
'…the board of directors of a company shall carry out its fiduciary duties with a sense of objective
judgement and in good faith in the best interests of the company and its stakeholders.'
The fact that the CEO has lost his temper with shareholders and walked out of a meeting suggests that
he is not showing appropriate courtesy and professional behaviour to that key stakeholder group. One of
the critical roles of the CEO is to maintain a positive relationship with major shareholders.
In addition, the CEO's remark on social media about his satnav, even if it was intended as a joke, shows
a disregard for the interests of the company and cast doubt on the reliability of the company's products.
It will be demoralising for employees, shareholders and anyone else with an interest in it. The fact that he
thought it was an appropriate to make this comment to over 500,000 social media followers and the lack
of a subsequent apology, shows a concerning lack of professional judgement expected from a CEO.
A further reason for concern is that a flippant comment was made about the reliability of his products
when, as the accident illustrates, an unreliable satnav can be very unsafe for customers. This suggests
that he may not take customer safety seriously and casts doubt on his integrity.
Commercial
In addition, there are several commercial concerns about the CEO's behaviour. His treatment of
shareholders, and attitude towards safety, as shown in his walking out of a meeting and comments about
the accident, are likely to make the shares less attractive and so the share price will fall. This fall may
mean that Techcon has difficulty raising capital in future, or be vulnerable to a takeover bid.
These events are also likely to lead to a fall in sales of satnavs, and possibly other products if the brand
is seen as unreliable. Even if the satnav was not to blame for the accident, it is likely that the social media
remark and the accident will be linked by the media, the public and even the competitors.
If Mr Iqbal believes that the satnav was to blame for his accident, it is quite possible that he will launch a
legal case against Techcon. This will require management time and money to defend, and may result in
Techcon paying compensation or a fine.
Part (b)

Tutorial notes
This section requires very strong command on Code of Corporate Governance Regulations, 2017 to
identify deficiencies in current practices. It is essential that students effectively plan for the requirements
to complete the breadth of deficiencies in the time available i.e. Chairman and CEO roles are not
separate, inadequate independent directors, no quarterly board meetings, lack of sound internal control
system and independence of internal audit function.

A comparison of Techcon's current practice with best practice, as set out in the Listed Companies (Code of
Corporate Governance) Regulations, 2017, shows several significant deficiencies.
Firstly, the Code requires that the roles of Chairman and Chief Executive Officer should be separated.
This is to avoid any one person acquiring too much dominance over the company and exercising decision-
making without proper discussion and scrutiny. The board minutes show Salmaan Umaar very much

Additional Practice Questions 22 The Institute of Chartered Accountants of Pakistan

 Answers

dominating the discussions, suggesting that by combining these roles, he is indeed exercising too much
dominance and a separate, independent Chairman of the Board would help to address this.
The Code also requires that there should be at least two independent directors, or one-third of the total
directors, whichever is higher. While there are three non-executive directors currently on the board, one
represents a shareholder and the other is the CEO's brother and a shareholder himself. This leaves only
NED2 as apparently independent, which reduces his ability to challenge decisions. There are eight
directors in total, so three should be independent. Suitable new independent directors should be recruited.
It appears from the minutes that the previous board meeting was held on 4 April, meaning a gap of nearly
six months before the next meeting was held on 29 October. This is too long a gap to allow for proper
discussion of issues affecting the company. Ideally, the board should meet at least quarterly.
It is also concerning that the Operations Director and Company Secretary did not attend the board
meeting, despite being critical members of the board. In particular, the Code states that the Company
Secretary should attend all meetings, or a nominee appointed by the board if a Company Secretary is not
able to attend.
The duties of the board include ensuring that 'a system of sound internal control is established' but the
discussions documented in the minutes seem to suggest a lack of internal controls, with decisions being
made at the personal direction of the CEO. For example, a branding consultant was appointed without any
involvement even from the Marketing Director. There is scope to improve the quality of discussion and
challenge by having key decisions brought to the board for scrutiny before being finalised, rather than simply
made by the CEO.
It is important that the internal audit function operates independently of senior management, reporting
functionally to the audit committee to ensure their independence. From the board minutes, it seems that
the CEO is personally directing the focus of the internal audit function, which is not appropriate. As chair
of the audit committee, NED2 needs to assert the independence of the function to focus on areas they
see as highest risk.
Part (c)

Tutorial notes
There are two parts of this requirement. For first part, students are expected to read the scenario
carefully and identify key skills required at Chief Executive Office to turnaround the image of the
company i.e. experience of similar quoted company, excellent relationship building skills and strong
focus on quality products. Using the information given in the question to identify additional skills
required is the key to ensure maximum marks. For second part, students are expected to compare
professional qualification, experience and skills of both candidates and recommend one candidate for
the role of CEO. It is essential to identify and assign weightages to different attributes i.e. qualification,
experience, skills and competencies according to the given scenario and recommend the candidate
accordingly.

Person specification
The items included in the draft person specification are important but there are some additional points
that could usefully be included.
Firstly, it would be helpful for the candidates to have CEO or senior management experience at a quoted
company. Managing a quoted company and dealing with the shareholder relationships and compliance
issues that result in very different from a privately-owned company. The new CEO will have to rebuild
relationships with shareholders and quite probably regulators, so previous experience of doing this would
be helpful.
A good candidate would also be skilled at building relationships with board members. It seems that the
relationship between the CEO and board has been quite poor, which makes it very difficult to run the
company effectively. Rebuilding this relationship will be a key task of the new CEO and it would be helpful
for them to have experience of this.
In its rapid growth, Techcon may have failed to develop appropriate controls, as seen by the centralised
decision-making by the previous CEO and concerns over the safety and reliability of products. It would
be useful for a new CEO to have experience of putting more formal controls in place and strengthening
an organisation's overall control environment.

Additional Practice Questions 23 The Institute of Chartered Accountants of Pakistan

Multi Subject Assessment - 2

One other point that could usefully be added is a preference for the candidate to have a strong focus on
quality of products. While Techcon's products have been innovative and successful, the CEO's tweet and
apparent lack of concern for quality and safety suggest that some of the focus on customer satisfaction
may have been lost. A CEO with a strong track record in this area could help re-establish this focus.
Candidates
Candidate A:
Both candidates do appear strong and worth considering. Candidate A has experience of running a major
technology company, which is highly relevant, as well as an emphasis on talent management, which will
be important for an innovative, fast-growing company like Techcon. They also have experience of
managing relationships including with the board, and in being proactive in communicating with them.
Candidate A is a qualified accountant and former Finance Director, which should ensure a good
commercial understanding and focus on effective internal control. On the other hand, Candidate A does
not seem to have direct experience of running a fast-growing business, as DYJ is already a large
company. It is also owned by a private equity firm, which means that A will not have experience of dealing
with the compliance aspects of being a quoted company or dealing with institutional shareholders, at least
not recently.
Candidate B:
Candidate B has direct experience of leading a company through a floatation and adjusting to the new
environment that this required, including the focus on controls, managing relationships and hiring a
suitable management team. This seems like very relevant experience to improve Techcon in its current
situation, as it adjusts to being a quoted company.
Candidate B also has a very successful record, with growth of 300% in turnover under his/her leadership,
although further investigation would be needed to identify the causes of this, and how effectively that
revenue was translated into profit.
Candidate B also focuses on the customer, an emphasis that will be important to Techcon in recovering
their situation.
Candidate B's education is not specified, and this would also need to be the subject of enquiry.
Conclusion and recommendation
Candidate A and B are both strong candidates and further investigation is needed, but based on the
information supplied Candidate B has more relevant skills and experience to lead the improvements
required at Techcon, particularly having led a fast-growing company and managing the transition to being
quoted.

Additional Practice Questions 24 The Institute of Chartered Accountants of Pakistan