Professional Documents
Culture Documents
2023
Case Study 1
Pre-Released Information
Zim
2023
Professional Competence
Development Programme
CASE STUDY 1: INTRODUCTION TO
PROFESSIONAL COMPETENCE
PRE-RELEASED INFORMATION
IDENTIFICATION OF SIGNALS
(Zim Adapted)
Disclaimer: All names of persons, places, and business entities mentioned in this case study are purely fictitious in nature
and any resemblance to real people, living or dead, places or business entities are purely coincidental.
1. Background information
Constructco Holdings Limited (‘Constructco’) is a company listed on the main board of the ZSE
Limited in the Industrial sector. The company has interests in the construction and engineering, road
construction, underground mining development, construction materials and related fabrication sectors.
The company does not trade and all of its activities are undertaken through a number of subsidiaries,
joint ventures (often with the public sector) and associates.
Constructco has the reputation of being one of Zimbabwe’s leading companies, offering engineering,
general building and construction, material supply and services to various sectors of the economy. It is
proud of its significant contribution to sustainable socio-economic development in Southern Africa over
100 years through creating employment and developing skills, building infrastructure, delivering
services and applying technology and built capacity throughout the region.
Constructco’s share price has been declining for several years, trading at a quarter of the peak share
price recorded in 2008. Constructco has a dividend policy of between 2,8 and 3,2 times cover on full-
year headline earnings, and management is of the view that any cut in dividends will further harm the
share price.
Independent non-
executive directors
Dr C. Luhabe Chair of the Board, Chair of Nomination Committee,
member of Remuneration and Social and Ethics
Committees
Mr K. Maree Chair of Remuneration Committee, member of Audit
and Risk Committee
Mr P. Naidoo Member of Nomination, Audit and Risk and
Remuneration Committees
Dr Z. Hendricks Chair of the Audit and Risk Committee, member of
Nominations Committee
* Mr C. Wise and Mr A. Price were recently appointed to their respective positions, replacing two
senior executives who stepped down. Refer to point 4 below for more information.
3 Copyright © APT/CAA Zim 2023
Case Study 1 – 2023 – Pre-released information – Zim
You are a newly qualified CA (Z) and hold the position of assistant to the CFO of Constructco. The
company secretary is Ms N. Jacobs. The audit and risk committee attends to all matters of an audit
and risk nature for the group and its subsidiaries.
The 2023 shareholder, audit and risk committee and board calendars are as follows:
Shareholder Calendar
Date Time Detail Notes
30 November 10h00-11h00 Annual general meeting Scheduled
2023 1. approve annual financial statements
2. ordinary and special resolutions
5 June 2023 10h00-12h00 Approval of 2024 budgets and status update Scheduled
of external audit
Board Calendar
Date Time Detail Notes
21 February 12h00-14h00 Interim results to 31 December 2022 Meeting took
2023 place on
21/2/2023
The following are extracts from the most recent financial statements for the year ended 30 June:
Recent years, including the 2022 financial year have presented almost unprecedented challenges
for Constructco. Consistent with the rest of the sector, Constructco has had to grapple with poor
project profitability and rising liquidity concerns, due to, amongst other things, delayed payments,
particularly in the public sector. These serious challenges were compounded by a slowdown in
Zimbabwean public sector spending on infrastructure, global conditions and challenging domestic
economic and political conditions. Aside from the difficult trading conditions, the company’s
profitability was impeded largely due to challenges experienced on major projects. The estimated
costs to complete, inclusive of penalties, on a number of contracts increased significantly.
Furthermore, the decision to dispose of certain business operations resulted in asset impairments.
In addition, the Competition and Tariff Commission’s findings into the construction industry have
continued to leave lingering effects in the industry. The investigation of the construction industry
uncovered widespread anticompetitive conduct through various arrangements. Major firms in the
sector, for example, held meetings to allocate tenders and police each other’s behaviour through
various structures.
Constructco’s order book at 30 June 2022 was US$500 million (2021: US$400 million). The
operating margin contained in the order book is within the Group’s strategic range of 5.0% to 7.5%.
The Zimbabwe National Road Administration (ZINARA) is currently inviting tenders for the
maintenance of the Skyline toll gate. This US$100 million project is in the Harare province, and
Constructco Civils, a wholly owned subsidiary of Constructco, is confident that it has the capacity
and expertise to undertake this project. Constructco Civils operates exclusively in the business of
the construction and maintenance of roads (Refer to Annexure B for more information).
4. Leadership change
Two senior executives stepped down during the year and were replaced by Mr C. Wise and Mr A.
Price. In order to provide support to the new CEO, an advisory committee to the CEO comprising
the two retired senior executives and two other prominent individuals was established. In addition
to cash payments for their services rendered, Mr C. Wise approved that the two retired senior
executives be compensated for their involvement in the advisory committee by way of a share-
based payment scheme. Accordingly, he approved the share-based payment scheme effective
1 March 2023. The share-based payment scheme will need to be accounted for.
This change in the leadership has been a defining moment for Constructco. Mr C. Wise and Mr A.
Price, both CAs (Z), come from within the ranks of Constructco.
Their priorities:
� Determine the way forward for the struggling company
� Address the liquidity concerns
� Attend to profitability
5. Technologies
6. Minutes of the audit and risk committee meeting held on 21 February 2023
Mr A. Price has arranged that you receive a copy of the minutes of the audit and risk committee
meeting held on 21 February 2023, as it is his habit to ask you for assistance on various matters
arising (Refer to Annexure A for more information).
Minutes of the Audit and Risk Committee meeting held on 21 February 2023
Attendance
Present:
Apologies
Dr Z. Hendricks (ZH)
By Invitation
Quorum
A quorum being present, the chair declared the meeting duly constituted.
The chair welcomed all present and NOTED apologies from ZH.
1. Agenda
3.1 NJ stated that the external auditors raised the issue of non-compliance by the group with certain
corporate governance requirements, as well as the fact that the board and committee charters
have not been updated for the King IV report and the Companies and Other Business Entities Act
(Chapter 24:31) (COBE).
3.2 PN commented that this is an internal company matter and another example of over-regulation.
BZ responded that the ZSE’s listing requirements require compliance with Zimcode, that the
charters should be updated and that the audit firm can provide assistance in this regard, if needed.
The Zimcode has been complied with fully. However, the focus of the board is now on King IV
compliance and any reference to governance is directed to King IV.
3.4 PN complained about the absence of a risk register for the group.
4. ZSE review
4.1 BZ informed the committee of the financial reporting review process undertaken by the ZSE and
advised the committee that the audit firm can provide assistance in this regard to ensure the
financial statements comply with IFRS in all respects. The latest ZSE proactive monitoring report
was tabled and discussed.
5.1 The committee was unable to approve the interim reporting for the group for the six months ended
31 December 2022 due to delays experienced.
5.3 The declaration of an interim dividend was deferred as the interim results were not approved.
5.4 RESOLVED: Interim results and dividend declaration to be approved via round robin.
6.1 AP raised the issue that subsidiaries need not comply with IFRS, but with IFRS for SMEs. He
requested the committee to approve the change for the subsidiaries’ accounting basis to IFRS for
SMEs, as this will simplify the preparation of the financial statements. The committee discussed
the recommendation and resolved to discuss the matter further at the next meeting.
7.1 BZ presented the year-end audit strategy. The focus of the audit will be more substantive-based,
as reliance on controls will be limited.
7.2 The committee discussed the audit fee of the group and subsidiaries of US$130,000. This
represents an increase of 8% in the external audit fee.
7.3 PN enquired about the calculation of the materiality figure, the work the auditors will perform in
order to ensure compliance with laws and regulations and the disclosure requirements regarding
related-party transactions. KM requested BZ to provide PN with the information after the meeting.
7.4 RESOLVED: Approval of the increased external audit fee for 2023. It was also agreed in future
only to use the services of W. for other professional services requirements.
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ZINARA TENDER
Current Tender
Region: Eastern Region
Contract
NRA N003-012-2023/1
Number:
Project
NRA N003-012-2023/1
Number:
Contract
MAINTENANCE OF THE Skyline TOLL GATE
Description:
The Zimbabwe National Roads Administration SOC Limited (ZINARA) invites tenders for the MAINTENANCE OF
THE SKYLINE TOLL GATE. This project is in the Harare province.
Only Tenderers with previous experience in Toll Road Maintenance will be eligible to tender.
Tender documents which will be issued in electronic format on a USB will be available as from
27 March 2023 and may be obtained from the Regional Manager, Central Region, ZINARA House, Number
489, Glenroy Shopping Centre, Highlands, Harare (Tel: (0242) 442711-3) during the hours 08:00 to 16:00
(Monday to Friday).
A non-refundable fee of US$50.00 is required, and this is payable by means of direct deposit or electronic
funds transfer to ZINARA, Bank: CBZ Bank Limited, Branch Number: 335545, Account Number: 1045510073,
Tender Notice: Reference Number (call the ZINARA office on (242) 442711-3 for the reference number - do not make a
payment without the reference number). Proof of payment must be provided on the collection of Tender
Documentation.
A compulsory Tenderers’ clarification meeting with representatives of ZINARA will take place at 09:00 on
29 March 2023 at ZINARA House. Latecomers will not be admitted to the clarification meeting and their
tender submissions shall be regarded as non-responsive.
Tenders need to be submitted in a format clearly indicating the cash flow assumptions and discount rates
applied thereto.
Replacement cycle; the road must be resurfaced every two years and drainage gullies and bridges refurbished
as necessary.
Constructco Civils paid the non-refundable fee of US$50.00 and management attended the
clarification meeting and ascertained the following detailed information.
The contract would commence on 1 January 2024 and last for five years, and the commencement of
the contract cannot be delayed. The skilled labour force of Constructco Civils has spare capacity to
the extent that sufficient skilled labour will be available to support the contract.
Constructco Civils normally prices contracts on a cost-plus basis. Total cost is calculated by adding to
direct costs 60% for overheads, this percentage being based on previous experience. A target price is
then calculated by adding a 10.5% profit mark-up to total cost. Constructco Civils management has
calculated the following target price for the Skyline Tollgate contract under consideration which was
presented at the previous board meeting:
The Skyline Tollgate contract would require the immediate use of special materials, which were
purchased one year ago at a cost of US$5 000 000 for another contract which did not finally require
the materials due to a change in project design. These special materials have a current purchase price
of US$6 000 000 and a current realisable value of US$3 000 000. The company foresees no
alternative use for these special materials. Usage of other materials would be spread evenly over the
five years of the contract duration. Constructco Civils regularly uses these other materials.
The standard costs reflect current purchase prices, which are expected to continue at the present level
until 31 December 2023. On 1 January 2024, the prices are expected to rise by 10%.
Skilled labour costs for the contract represents 80 000 hours each year at a standard cost of US$20
per hour. Unskilled labour hours required are 640 000 hours per annum for the contract at a standard
cost of US$3.50 per hour. Standard costs are based on current wage rates and hourly wage costs for
both skilled and unskilled labour and are expected to increase by 5% on 1 January 2024 and by a
further 10% on 1 January 2026. Due to a current shortage of skilled staff in the industry, the company
will retain its skilled employees, whether or not the contract is accepted.
Non-acceptance of the project would create spare capacity in the skilled labour area, but Constructco
Civils is able to outsource skilled labour to other companies for limited times and would be able to
recover the costs of the skilled labour, if required.
An analysis of the most recent accounts of Constructco Civils shows that total overheads may be
categorised as follows:
Fixed administrative and office costs would be incurred whether or not the contract is accepted, and
the costs are expected to increase as a result of inflation by 5% on 1 January 2024 and by a further
10% on 1 January 2026. There is sufficient capacity for the next two years in terms of plant and
equipment for Constructco Civils to undertake the contract. If a particular item of plant and equipment
is not being used for any specific contract, depreciation becomes a period cost from an accounting
and tax perspective. The plant and equipment may be needed for future projects in five years’ time,
The weighted average cost of capital (WACC) of Constructco Civils has been estimated as 16% for
the year 2024, but due to expected increases in interest rates, it is expected that the company’s cost
of capital will increase to 18% from January 2025. The marginal cost of debt for the firm is the
Treasury bill rate plus 2%, while the cost of equity is based on the cost of equity for the holding
company, Constructco. Management has frequently debated whether the calculation of the WACC for
Constructco Civils is appropriate, but given that Constructco Civils is unlisted, it is unsure as to what
the alternatives are.
The costs that vary directly with direct costs are expected to remain at a constant percentage of 6% of
direct costs in the future.
The company’s marginal tax rate will be 27%. You may assume the depreciation of plant and
equipment is the same as the tax allowance on the plant and equipment. The current book value of
the relevant plant and equipment is US$14 658 400, and the plant and equipment is being depreciated
over 10 years to a residual value of US$1 000 000. The plant and equipment was purchased three
years ago and qualifies for a tax and accounting depreciation allowance of 10% straight-line. The
current market value of the plant and equipment is US$15 500 000, and the projected market value in
five years is US$7 250 000. If the ZINARA tender is not successful, the plant and equipment will be
sold.
In terms of the Income Tax Act, the cost of construction work in progress, which is included in closing
inventory, is the sum of the cost of materials used and any further costs (direct and indirect) incurred,
which in accordance with generally accepted accounting practice are to be regarded as having been
incurred in connection with the relevant contract. The cost of construction work in progress is to be
reduced by income received by, or accrued to, the taxpayer. Section 15(2)(cc) of the Income Tax Act
applies where appropriate.
ZINARA will pay the full tender price on commencement of the project (1 January 2024). You may
assume that Constructco Civils will have other taxable income going forward.
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