BUM ere eee Ulta) CASE STUDY STUDY MANUAL CA Advanced Level Poem OLS foe Gus) 5 ACCOUNTANTS aN aes Inc}The Institute of Chartered Accountants in England and Wales CASE STUDY For exams in 2014 Straus) www.icaew.com,Case Study ‘The Institute of Chartered Accountants in England and Wales ISBN: 978.0-85760-740-9 Previous ISBN: 978-0-85760-489-7 First edition 2009 Fifth edition 2013 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, ‘mechanical, photocopying, recording or otherwise, without the prior written permission of the publisher. British Library Cataloguing-in-Publication Data ‘Acatalogue record for this book is avallable from the British Library ‘We would like to thank = Sam Binks = Harvey Freeman, = Catherine Blease {or their assistance in the preparation of the Case Study Learning Materials Printed in the United Kingdom by Polestar Wheatons Polestar Wheatons Hennock Road ‘Marsh Barton Exeter EX? BRP Your learning materials are printed on paper obtained from traceable, sustainable sources. ‘© The institute of Chartered Accountants in England and WalesWelcome to ICAEW | am delighted that you are training to become an ICAEW Chartered Accountant with our world-leading chartered accountancy qualification, the ACA. ICAEW Chartered Accountants are leaders in accountancy, findince and business. They are always in demand, respected for their understanding of complex financial information and trusted for their strategic business advice. ‘The ACA qualification is one of the most advanced learning and professional development programmes available. The knowledge, skills and experience you gain through ACA training ensures you'll have a highly rewarding career. Our members work around the world in all sectors, from accountancy firms (public practice) to commercial organisations, financial institutions, not for profit and the public sector. We are committed to delivering a professional qualification that gives you the essential knowledge, skills and experience that you'll need to perform at the highest level in accountancy, finance and business. To ‘ensure the ACA is relevant for you, your employer and the profession, we regularly review all ts elements so that it keeps pace with technical and statutory changes, and the needs of our stakeholders. ‘This review has formed the way the ACA is evolving and we have made some changes. if you have a question relating to the changes, email us at studentsupport@icaew.com or visit the student area of our ‘website for the latest information As part of a worldwide network of over 19,000 students, you will have access to a range of resources and support as you progress through the ACA. Take a look at the key resources available to you on page wi | wish you the very best of luck with your studies; we are with you every step of the way. Michael izza Chief Executive ICAEWfeet icy Faculties and Special Interest Groups Introduction Case Study Key Resources Introduction to the Case Study Learning Materials, Financial Staternent Analysis Financial Data Analysis Operational and Strategic Analysis Including Business Trust and Ethical Awareness Professional Skils, the Executive Summary and Exam Techniques xvi 23 65 113 1591. Introduction ACA Overview ‘The ICAEW chartered accountancy qualification, the ACA, is one of the most advanced learning and professional development programmes available. Its integrated components provide you with an in- depth understanding across accountancy, finance and business. Combined, they help butld the technical knowledge, professional skills and practical experience needed to become an ICAEW Chartered ‘Accountant. Each component is designed to complement each other, which means that students can put theory into practice and can understand and apply what they learn to their day-to-day work. The components are: Profesional development Ethics and professional septic 3-5 years practical work experience 1S accountancy finance and business modules ICAEW CHARTERED ACCOUNTANT Professional development ICAEW Chartered Accountants are known for their professionalism and expertise. Professional development prepares students to successfully handle a variety of different situations that they encounter throughout their career. ‘The ACA qualification improves your ability and performance in seven key areas: + Adding value Communication + Consideration + Decision making + Problem solving + Team working + Technical competence Ethics and professional scepti Ethics is more than just knowing the rules around confidentiality, integrity, objectivity and independence. Its about identifying ethical dilemmas, understanding the implications and behaving appropriately. We integrate ethics throughout the ACA qualification to develop students’ ethical capabilities ~ so they will always know how to make the right decisions and justify them. 3-5 years practical work experience Practical work experience is done as part of a training agreement with one of our 2,850 authorised training employers around the world. Students need to complete 450 days, which normally takes between three and five years. The knowledge, skills and experience they gain as part of their training agreement are invaluable, giving them the opportunity to put what they/re learning into practice. 15 accountancy, finance and business modules Each of the ACA modules is directly relevant to the work that students do on a day-to-day basis. They will gain in-depth knowledge across a broad range of topics in accountancy, finance and business. There are 15 modules over three levels. These can be taken in any order with the exception of the Case Study which has to be attempted last. Students must pass every exam (or receive credit) - there are no won izoptions. This ensures that once qualified, all ICAEW Chartered Accountants have a consistent level of knowledge, skills and experience. [ADVANCED Po ~ Ea Ea PROFESSIONAL zw [net | weve ‘ceniAcaTe teva, Certificate Level There are six modules that will introduce the fundamentals of accountancy, finance and business. They each have a 1.5 hour computer-based assessment which can be sat at any time, Students may be eligible for credit for some modules if they have studied accounting, finance, law or business at degree level or through another professional qualification. ‘These six modules are also available as a stand-alone certificate, the ICAEW Certificate in Finance, ‘Accounting and Business (ICAEW CFAB). Students studying for this certificate will only complete the frst six modules. On successful completion, the ICAEW CFAB can be used as a stepping stone to studying for the ACA. Professional Level ‘The next six modules build on the fundamentals and test your understanding and ability to use technical knowledge in real-lfe scenarios. Each module has a 2.5-3 hour exam, are available to sit four times per year. These modules are flexible and can be taken in any order. The Business Planning Taxation and Business Strategy modules in particular will help you to progress to the Advanced Level. ‘Advahced Level ‘The Corporate Reporting and Strategic Business Management modules test students’ understanding and strategic decision making at a senior level. They present real-life scenarios, with increased complexity and implications from the Professional Level modules. The Case Study tests all the knowledge, skills and experience gained so far. It presents a complex business issue which challenges students’ ability to problem solve, identify the ethical implications and provide an effective solution. The Advanced Level exams are fully open book, so they replicate a reallfe scenario where all the resources are readily accessible.21 Case Study Overview The overall aim of the Case Study module is to ensure that candidates can provide advice in respect of complex business issues in the form of a written report. The objective of the Case Study is to assess understanding of complex business issues and the ability to analyse financial and non-financial data, exercise professional and ethical judgement, and develop conclusions and recommendations. The limited class time available with a tutor, even when supplemented by extensive home study, is insufficient for success in the Case Study. Students must bring work experience into their preparation and development programme. Success at the Case Study requires an integration of the technical knowledge and skils acquired from all of the ACA modules, namely: + The core technical knowledge and skills and practical application acquired at the Professional Stage; ‘+ The technical, analytical, evaluative and integration skills from the Business Change and Business Reporting modules; and + The advisory, judgemental and communication skills acquired through practical work experience undertaken during the training contract. All areas of the syllabus may be tested over time. The Case Study is designed to reproduce a typical situation in which chartered accountants find themselves. This may involve information arising from meetings and communicated in memoranda, letters or reports. The situation will generally involve a business plan or transaction and will involve preparation for meetings and submission of reports. The transactions and plans may involve a vatiety of business and professional advisors and stakeholders and meetings that they may attend. ‘The reality of such situations is that before any meeting you would: Expect to receive some materials in advance Carry out some work beforehand and refer to it during the meeting Not know the questions that you will be asked in the meeting Perform tasks as a result of the meeting Be expected to discuss and advise on relevant matters The Case Study scenario may be based on any one of a variety of different organisational structures or ‘operations. Students will be provided with advance information on the organisation and its business environment ahead of the exam, This information will not give specific indication of the eventual requirements of the Case Study. ‘Students will be expected to familiarise themselves with the information provided about the organisation and the industry in which it operates, undertaking some additional analysis and research. ‘Students may take the results oftheir work into the examination room. The Case Study will not require the detailed computations needed for the Professional Stage or Technical integration modules at the Advanced Stage, but students will be required to undertake financial and business analysis. Requirements will be open in that there will be no predetermined correct answers to the Case Study. tnvvodueton i2.2 Professional skills @ &) Cognitive, analytical and evaluative skills 1 Identification of business, technical and ethical issues 2 Application of technical knowledge to identified issues 3. Understanding of scenario and wider business issues 4 Understanding of the relevance of data and information based on learnt, experienced and inferred knowledge Selection of appropriate analytical tools Analysis of requirements, situation and data Assessment of quality of informatic Candidate's balanced judgement of priorities, strengths, weaknesses, opportunities and threats Consideration of other perspectives, including competitive reaction and internal reaction 10. Conclusions and recommendations based on evidence, implications, assumptions and information generated ‘Communication and articulation skills Structure in presentation of data and written work Integration and positioning of data within and alongside written work Tact in presentation Objectivity in presentation Format and language 2.3, ACA Skills Development Grid FR a ron Pe ates) prs ry io = [emtes te skits Case Study24 25 The link to work experience ‘The work experience requirements for students provide a framework to develop appropriate work ‘experience, completion of which is essential in order to qualify for membership. Work experience is also. ‘an essential component for examination preparation The work experience framework is built around five key areas: * Business awareness — being aware of the internal and external issues and pressure for change facing an organisation and assessing an organisation's performance. ‘+ Technical and functional expertise ~ applying syllabus learning outcomes and where appropriate, further technical knowledge to real situations. ‘+ Ethics and professionalism ~ recognising issues, using knowledge and experience to assess implications, making confident decisions and recommendations. ‘+ Professional judgement ~ making recommendations and adding value with appropriate, targeted and relevant solutions. ‘+ Personal effectiveness — developing, maintaining and exercising skils and personal attributes necessary for the role and responsibilities. The examinations embrace all of these skill, The link between work experience and the examinations will be made explicit through input to the work experience framework by the examiners This will help students see that their practical knowledge and skis gained in the workplace feed back into the exam room and vice-versa. The message is clear ~ students should use the work experience framework and skills development grids to ensure success in exam performance and success in their workplace performance. Professional skills and the Case Study Because there is no new technical knowledge for the Case Study, all the marks are awarded for the demonstration of professional skill. The following pages set out a description of: ©The specific skills that are assessed + How these skills are assessed ADVANCED STAGE a “N TACs J ee] sopeatese (reughout a supper ETHICS i TACs ‘snes deco rang PROFESSIONAL STAGE Work experince pte Apicion nes sioner. awa, __. 2 et erdopmet ees as knowledge modules cree area woncnCase study: Skills and how they are assessed, ers Oren incerta Understanding the subject matter ‘Accessing, evaluating and managing data and information provided in multiple sources (Some pre-disclosed) and from independent research plans Using technical knowledge and professional ‘experience to assess interaction of information from different sources Understanding an organisational framework: ‘evaluating the strengths and weaknesses of an | ‘organisation and comparing with benchmarks Planning, controlling and evaluating operations in a global context Understanding the needs of customers/clients {internal and external) Demonstrating an understanding of the significance of ethics in the business ‘environment and the importance of ethical behaviour Using relevant content of the International and ICAEW Codes of Ethics Demonstrating an understanding of the regulatory structure of the profession, its ethos, culture and role in corporate and social How skills are assessed Uses the Advance Information (Al), Exam Paper (EP), knowledge of ethical codes and professional experience to define the specific issue/situation Uses own understanding of context and findings Describes wider context Identifies business issues — Understanding of business entity = Understanding of position in industry sector — Appreciation of wider economy Recognises where business is in its life cycle LeAssessed skills Structuring problems & solutions Using the information given: analysing and | « evaluating requirements, information, issues and business context Analysing, evaluating and synthesising new ‘and complex ideas . Displaying an enquiring and questioning mind . | Identifying faults in arguments and gaps in| « evidence | Demonstrating an understanding of the pressures on professional ethical behaviour, including the interaction between professional ‘ethics, the law and other value systems, Financial data analysis: = Analysing and evaluating data by . selecting appropriate analytical and technical tools and applying technical knowledge and professional experience = Demonstrating an understanding of sensitivities to change: flexing a range of inputs and evaluating potential . outcomes = Fvaluating, prioritising and trading off solutions to complex problems, considering various perspectives, including those of competitors and Financial statement analysis: ~ Analysing and evaluating financial statements by selecting appropriate analytical and technical tools and applying technical knowledge and professional experience = Linking all elements of financial | statements, evaluating and making | comparisons where there are complex |. interactions | = Evaluating financial statements in the context of other business information | ces Identifies and uses key information | Demonstrates technical knowledge Uses professional experience | Uses relevant strategic analytical tools (SWOT, PESTEL, Porter's 5 Forces) Performs relevant analysis Produces quality analysis = Depth - Breadth - Logic Reasonableness Uses knowledge of ethical codes and professional experience to perform relevant analysis Financial data analysis: Uses appropriate analytical tools (valuation methodologies, sensitivity analysis) Performs relevant analysis on — Numerical data = Other information Integrates numbers and words Financial statement analysis: Uses appropriate analytical tools to measure financial performance, identify trends and make comparisons Performs relevant analysis on ~ Financial statements = Other information Integrates numbers and wordsee ee Dsante uae fee ‘+ Using technical knowledge, and professional | « experience and evidence to support reasoning | | ‘+ Applying discrimination: filtering information | to identify key factors * + Applying a sceptical and critical approach + Interpreting information from a range of . stances and developing arguments, appreciating the perspective of other parties ‘© Conducting critiques: considering alternative views in testing the validity of ideas in practice + Considering and evaluating the effects of a range of alternative future scenarios Seeking opportunities to add value + Prioritising key issues + Applying the concept of materiality to interrelated situations ‘Appreciating the ethical dimensions of situations, exercising ethical judgement and explaining the consequence of unethical behaviour Appreciating when more expert help is required identifying linkages, inconsistencies, ambiguities Peo ae uc) fee Generating solutions for complex problems Using information from multiple sources Using technical knowledge, professional . experience, evidence and analysis to support conclusions + Using valid and different technical sil to formulate opinions, advice, plans, solutions, | options and reservations ‘+ Making decisions and recommendations in| unstructured situations in which risks and uncertainty may exist | ‘+ Specifying the criteria for the most | appropriate proposal | + Assessing the costs and benefts that may flow | from a decision * Approaching decision making using an ethical | framework | Builds on implications of analysis Identifies and uses key financial information Recognises linkages Evaluates key points Discusses output = Pros/cons Demonstrates professional scepticism Demonstrates objectivity/balance Demonstrates an appreciation of more than one sideybias Evaluates options Prioritises key points Uses knowledge of ethical codes and professional experience Draws conclusions linked to analysis and judgement Makes practical commercial recommendationseee ec Pee Integrative and multidisciplinary skills | + Time awareness: recognising time constraints | * Provides appropriate terms of reference and prioritising given tasks (purpose, scope, disclaimer) ‘+ Preparing, describing, outlining the advice, | ¢ Provides an executive summary that is | report, notes required in a clear and concise consistent with the main report style ‘+ Demonstrates appropriate balance between ‘= Relating parts and wholes: discerning requirements | intertelated isues as part of complex | scenarios, employing a sense of perspective in ‘* Uses sufficient but not excessive sub-divisions over-viewing situations ‘+ Uses appropriate but not excessive use of | = Penang tee: notes and bullets specialist audience ‘+ Uses correct style and language for audience | | with appropriate tact | | «Contains appropriate appendices = Calculations easy to follow } — Assumptions clearly set out — No excessive text ~ Figures appropriately caried forward to main report + Provides a coherent answer to the requirement = Covers the major elements |x Suitable use of figures = Figures clearly derived — Flows logically aKey Resources Student support team ‘Our student support team are here to help you as much as possible, providing full support throughout your studies. T +44 (0)1908 248 250 F +44 (0)1908 248 069 E studentsupport@icaew.com Student website ‘The student area of our website provides you with information on exam applications, deadlines, results and regulations as well as applying for credit for prior learning (CPL)/exemptions. The study resources section includes advice from the examiners, module syllabi, past papers and sample papers, webinars and study guides. The study guides are designed to help put the learning for each module into context and highlight the practical significance of what youll learn, They also include the syllabus, technical knowledge grids and learning outcomes for each module, enabling you to gain an overview of how your learning links to the qualification. Visit icaew.com/students for these resources and more. Online student community The online student community is a forum to ask questions, gain study and exam advice from fellow ACA and CFAB students and access our free webinars. There are also regular Ask a Tutor sessions to help you with Key technical topics and exam papers. Access the ‘community at icaew.com/studentcommunity Tuition “The ICAEW Partner in Learning scheme recognises tuition providers who comply with our core pnnciples of quality course delivery. If you are receiving structured tuition with an ICAEW Partner in Learning, make sure you know how and when you can contact your tutors for extra help. If you are not receiving structured tuition and are interested in classroom, online or distance learning tuition, take a look at our recognised Partner in Learning tuition providers in your area, on our website icaew.com/students Faculties and Special interest Groups, Faculties and special interest groups support and develop members and students in areas of work and industry sectors that are of particular interest. There are seven faculties which provide knowledge, events and essential technical resources. Our 12 groups provide practical support, information and, representation within a range of industry sectors including Charity and Voluntary, Entertainment and Media, Farming and Rural Business, Forensic, Healthcare, Insolvency, Valuation, Tourism and Hospitality, and more. Students can register free of charge for provisional membership of one special interest group and receive a monthly complimentary e-newsletter from one faculty of their choice. To find out more and to access a range of free resources, visit icaew.com/students The Library & Information service (LIS) ‘The Library & Information service (LIS) is ICAEW's world-leading accountancy and business library. You have access to a range of resources free of charge via the library website, including the catalogue, LibCat. Visit icaew.com/library for more detail.CHAPTER 1 Introduction to the Case Study Learning Materials Overview Introduction to the Case Study Learning Materials Topic List 1 About the Case Study 2. Case Study structure 3. Case Study assessment and the marking key 4 Preparing for the Case Studyean This chapter introduces candidates to the Case Study exam together with an explanation of the purpose of this Study Manual and related Learning Materials. It brings together and summarises information ‘concerning the Case Study structure and the methods of assessment, and provides an extract from a typical marking key. There is also a section on preparing for the Case Study. In addition to this introductory chapter, the Study Manual comprises four other chapters which consider the Case Study from two interrelated perspectives. Chapters 2, 3, 4 consider the key requirements normally asked of candidates (each of which has an equal weighting) in the Case Study, namely: Chapter 2: Financial Statement Analysis Chapter 3: Financial Data Analysis Chapter 4: Operational and Strategic Analysis ‘These chapters each include a truncated and updated Case Study (based on a previous Case Study exam) for students to practise the specific analytical skills discussed in the chapter. Chapter 5 considers the assessment from the overall perspective of the professional skills which are assessed, namely: ‘+ Assimilating and Using Information (A&UI) ‘Structuring Problems and Solutions (SPSS) + Applying Judgement (A)) + Conclusions and Recommendations (C&R) Chapter 5 also considers the Executive Summary: its purpose; form; preparation and assessment In addition to this Study Manual there are separate volumes which cover (1) an entire Walkthrough’ of a recent exam (Luvlox) and (2) two separate 'Workbooks' covering two other cases: WW and FS. These separate volumes will enable students to study in detail how to approach a full Case Study exam and provide material for them to practise ahead of the actual Case Study exam. Although this Study Manual covers all three aspects of business analysis, each topic is designed so that it can be studied individually However, none of these topics can be viewed independently. They are intertwined because the financial statement analysis - the analysis of how the business has been performing in its immediate past ~ informs the financial data analysis ~ which usually considers a current issue facing the business. The analysis of the business from these two perspectives (past and present) informs, and is informed by, the ‘operational and strategic analysis, which considers the business from the present to the future. mz adeee etn RCE Ty] Ree MCCUE ‘The Case Study Learning Materials comprise: © The Case Study Manual, consisting of five chapters © The Walkthrough’ based on Luviox (the july 2012 exam) © Two practice exams: = WW (the july 2011 exam) = FS (the November 2012 exam) The contents of the Case Study Manual are: © Chapter 1: Introduction; the context of the Case Study exam and an initial review of the skills required + Chapter 2: Financial Statement Analysis using a case entitled 4D ‘+ Chapter 3: Financial Data Analysis using a case entitled 1A] ‘+ Chapter 4; Strategic, Operational and Ethical Analysis using a case entitled CROP ‘+ Chapter 5: An overall review of the assessment skils and the Executive Summary Each of the three chapters (2, 3, 4) covering the key analytical areas in which a candidate needs to be ‘competent in order to pass the exam includes a separate, truncated case based on a previous actval Case Study exam. These truncated cases, which have also been updated where relevant, provide a précised example for the explanation of the various techniques involved in each chapter. The three truncated cases have been selected for inclusion because they represent appropriate examples of the issues and techniques which need to be considered and mastered in order to tackle the exam. These chapters can be studied independently of each other although there are common themes throughout. If, when considering one of the three cases, you identify more current business issues which did not apply at the time when the case was presented, this is perfectly acceptable. + The separate volume entitled ‘Walkthrough’ isa section in which an entire recent case exam is dissected as an aid to students, using as an example Luviox (the July 2012 exam). = The two practice exams (WW and LT) provide opportunities to practice and refine skills. Each comes with a detailed analysis of how each paper should have been tackled, in the form of a debrief pack. While each exam is unique and presents its own issues and challenges, you will be able to identify the areas of commonality between Case Study exams as well as areas of difference. In respect of ‘commonality, all exams require that a candidate analyses the business scenario as presented in the ‘Advance Information and developed in the Exam Paper. The business scenario is always presented as a mixture of business history; business context; financial, operational and commercial information; together with topical news and other relevant information. The information is therefore a mixture of ‘hard! facts concerning the business together with more ‘soft’ contextual information and opinion relating to the business - a candidate must be fully familiar with all the ‘hard! and ‘soft’ information presented. Differences in the structure of the Case Study in comparison with the other ACA exams are reviewed, together with the differences expected in student preparation prior to the exam. There is an emphasis (on the change in mindset that is required for the Case Study, the importance of starting your preparation as early as possible, and linking your academic studies as closely as you can to your experience in the workplace. ‘The major differentiators in candidate performance and key success factors for the Case Study are identified together with the differences between better and weaker scripts on specific sections of cases. In discussing the communication skills that are essential for success in the Case Study, the Learning Materials emphasise the pre-eminence of quality over quantity. Invductnto the Cave Sty earing Matt i”The assessment process is explained, so that you can understand what the examiners are looking for and. how to satisfy them. The five professional skills areas on which the Case Study assessment process is founded are examined and broken down into their individual components. The five skills areas a {Assimilating and using information Structuring problems and solutions Applying judgement Drawing conclusions and making recommendations Integrative and multidisciplinary skills Advice is offered on how to demonstrate these skills as effectively as possible in the exam setting, and how they interact with each other. Exercises (with skill tips and tutor notes) are provided to enable you to understand how to use the Case Study Advance Information in preparation for your exam, as well as to help build your professional skis By providing real contemporaneous examples, the Learning Materials show how to make effective use of current business issues, SWOT, PESTLE and Porters Five Forces analysis. The workbook is interspersed with ‘skills tips' for easy reference. By working through these Learning Materials, you should come away with extensive ideas on many techniques to help maximise your chances of success in the Case Study: How to analyse and use Case Study information including the wider context How to use your analysis effectively in structuring problems and solutions How to use SWOT, PESTLE and Porter's Five Forces analysis How to make effective use of any external material How to deal with financial information that is presented in a non-standard way How to produce effective appendices and refer to them in main report How to produce a high-quality executive summary How to use the four hours effectively in the exam itself How to demonstrate professional scepticism How to identify ethical issues and demonstrate ethical judgement How to exercise and apply judgement How to form (and communicate) recommendations and conclusions How to achieve ‘user focus' (ie remember the audience) How to add value How to organise your answer With tips, hints and extracts from the examiners’ commentaries, these Learning Materials will give you a comprehensive toolkit that, if used properly as part of your preparation, will provide a pathway to passing the Case Study. The Learning Materials have been written and structured in such a way as to be suitable for both self-study and tutor-assisted learning, ) | cues1.1 1.2 1.24 About the Case Study Introduction Chartered Accountants (members of ICAEW) today are business and financial advisors. As an ACA, your ‘unique selling point when compared with other advisors to business — be they lawyers, bankers, marketing or public relations specialists - is that you will have the knowledge and skis to understand and interpret financial and other business data and communicate the underlying issues to your clients. This professional skill of combining confident financial fluency concerning a client's business and being able to present information in a clearly understandable way to that client is a key role for an ICAEW Chartered Accountant. This role may be encapsulated in the phrase ‘making the numbers talk’ During the first two years of your training, you will have received a thorough grounding in the concepts and principles that underlie the preparation, interpretation and use of financial and business information. in preparing for the other Advanced Stage exams, you will enhance your technical knowledge and develop the skils to tackle business scenarios that generate technical problems. The objective of the Case Study is to assess your understanding of more complex interactions of business issues and your ability to analyse financial and non-financial data, exercise judgement and develop conclusions and recommendations. Marks are only awarded for professional skills. The Case Study is always based on reallfe situations and generally centres on a request for advice or assistance, from either your client or your boss. In developing your advice, you will have the opportunity to carry out some preparatory work, on your own or with your peers and your tutors, in advance of the ‘exam, The exam requirements will ask you to assess and discuss practical, current commercial issues. To be successful at the Case Study, you will need to: Understand the business's situation, ie where itis located in its lifecycle (start-up, transition, maturity, decline) and the generic issues it will be facing + Identity the key issues relevant to the case + Use relevant data, identify interrelationships and generate new ideas and information ‘+ Apply appropriately your knowledge of technical and ethical matters in the context of the case + Develop relevant quality analysis using the financial and non-financial data given ‘+ Apply your professional judgement and consider the consequences of your ideas © Develop clear conclusions and recommendations based on your analysis + Produce a well-structured document, using appropriate language to communicate your ideas to your audience. ‘These Learning Materials are designed to assist you in preparing to meet these requirements. Comparison between the Case Study and the other ACA exams Differences in structure ‘The Case Study is unlike any of the other ACA exams. Although you have been able to use open books, you will not have had an opportunity for advance study of the scenario on which the exam will focus. The Advance Information (Al) provided for the Case Study, provides this opportunity for the Case Study Exam Paper (EP), In more ways than one, the Case Study is probably also the longest exam you will have sat. Not only is it a four-hour paper, but you will also have spent at least two days working directly towards it. Furthermore, in the four hours, you will be expected to produce only one piece of output (such as a report), although it will have a number of sections. if you have prepared properly, you should find that the four hours are not enough for you to say al that you would like to say in the report, and the challenge will be to discipline yourself to answer the requirements you have been set. Your two days of direct preparation will have been spent familarising yourself with, and analysing, the ‘advance Information’ about the organisation on which your Case Study exam paper is to be based. At the end, you will know the entity as though it were your client or employer, and you will have settled icon te Ce St ein Matias ayourself into the role that you are going to be asked to take on in the exam. You will aso have an understanding of the industry sector in which the organisation is based. 1.2.2 _ Differences expected in student preparation prior to the exam ‘What is the recommended preparation time for the Case Study? You begin your preparation as soon as you start your training contract, because the main distinguishing feature of the Case Study is that it is a ‘reals’ situation requiring you to bring to bear all the expertise and experience that you have accumulated since your first day at work. Developing your skills cannot be done in the final weeks before the exam. You will need to have planned your skills development programme as soon as you have completed your Professional Stage exams. 1.2.3 _ Difference in the assessment method for the Case Study ‘The Case Study is marked by reference to a Competency Based Assessment (CBA) key. All the marks are awarded for the demonstration of professional skill. Where you are required to demonstrate your technical knowledge, marks will be awarded in the context of how you analyse the problem and structure your solutions. Because of this focus on skills, there will be no ‘right’ or ‘wrong’ answer (there may be for individual calculations, but these will form only a small part of the total). 2 The Case Study structure 2.1. The Advance Information (Al) Four weeks prior to your exam, you will receive the Advance Information (Al). This is a pack of (typically) 40-50 pages covering: You, your firm/employer, your role and your client or business ‘The commercial sector in which your client or business operates Financial, operational and commercial information about your client or business ‘Other information relevant to the case (eg customers, suppliers, potential acquirers or targets etc) The Al typically consists of 10-15 exhibits. Some of them will be mainly in narrative form (eg an industry overview), others will be largely numerical (eg extracts from a set of financial statements), and, the remainder will be a mixture of the two (eg a business plan or supplementary schedules to financial information or numerical analysis), together with any relevant legal or other documents, and current press articles. ‘The documents will also be in a variety of formats and styles: there may be an internal memorandum, a survey commissioned from an external industry consultant, a letter from a public body, and so on. One of your tasks will be to unravel all the stakeholders and understand their perspectives on the business. But, regardless of these differences in content and style, the exhibits will all operate together so as to form a whole picture, and there will be connections ~ or perhaps contradictions ~ between them that ‘you may be able to spot only on a very careful reading. ‘The numerical material could be in a form that you are familiar with and use in daily practice, such as Current IFRS, or the material may be presented in an alternative format such as national GAAP, regulated, or other format with which you are not familiar. Frequently the financial information is shown as ‘management accounts’ for ease of presentation with appropriate detail. Unless otherwise stated it should be assumed that these management accounts are in line with audited information and are accurate. However, if the information is in a non-standard or unconventional format, this would suggest that the examiner is likely to make some use of that format in the exam. You would therefore be well advised to familiarise yourself with the key aspects of it so that you feel comfortable in the exam itself. ‘The Advance Information will always include some background information on the industry in which the business operates. it might also provide details on a technical area that is relevant to the industry or to businesses of the same type and which is outside the syllabus for the other ACA exams - for example, in relation to the regulatory environment in which it operates. The purpose of ths is twofold: (i) to ensure that those candidates without practical experience of this technical area are not at a disadvantage; and, i) to indicate that all applicable information on the area is included and candidates do not have to undertake any significant further research on it. =~‘The purpose of issuing the Advance Information early is to allow you time to familiarise yourself with its contents, and to undertake any research and analysis you think fit. The intention is that, by the time you have finished working on the Advance Information, you will know the material as though it related to an ‘organisation with which you have had dealings in your work. ‘The examiners’ expectations are set out clearly in the standard rubric, reproduced below with the bold text as it appears. Inet toh Cae Sty ering Mate ma2.2 How to use the Advance Information Thorough preparation is one of the keys to success in the Case Study, given its breadth of subject matter and its assessment of professional skills. The required preparation can be broadly listed under six main headings: Familiarisation with all the information provided Financial statement analysis (understanding the financial story) Financial data analysis (understanding the detailed financial context) Operational and strategic analysis (understanding the strategic context) Developing industry and business awareness including ethical considerations Integrating and assembling your preparatory work Examples of questions that could be asked or matters that could be considered under each of the above headings are as follows: ‘+ Familiarisation with the information provided — What information has been provided? = What is your role? ~ What sort of organisation is the subject business? ‘What commercial, organisational or ethical issues may be discemed? — What information might you need which has not been provided? ‘+ Financial statement analysis Is the business making good profits, marginal profits or losses? — How does it make its profits? Why is it making losses? Is its balance sheet strong or weak? \s it appropriately financed? Is it generating or absorbing cash? © Financial data analysis — What additional financial information is provided apart from the financial statements? What key related non-financial factors are provided: legal agreements; tender documents? — What other numerical details are being provided for consideration: forecasts; tender prices? = What key assumptions for the additional financial or non-financial factors are provided? — What are the identifiable critical factors concerning the data provided: dates; tipping points? + Operational and strategic analysis Where is the business in its lifecycle? What generic issues face businesses at this point? What are the specific (potential) strategic issues facing this business at this © Developing industry and business awareness i Juding ethi What are the current industry issues? What are the top companies doing at the moment? = What are the current topical issues surrounding this industry/similar companies? = How can you use your personal experience? ‘* Integrating and assembling your preparatory work — What opportunities are there to brainstorm with colleagues? = What opportunities are there to talk with managers and partners or other senior colleagues? = What structured discussions can you have concerning any case issues with a learning group? = How can you create a clear structure and cross-referencing system? = How will you use your information? In summary, the recommended strategy is to familiarise yourself with the Advance Information to the ;point where you feel at ease with all sections of it and how they connect with each other. You may well want to identify some general headings under which the requirements are likely to occur ~ eg update of financial information for analysis; expansion or contraction of a revenue stream; appraisal of a new development project; consideration of a potential new strategic =~Skills tip Candidates should remember that the important thing is to be prepared to be flexible so that you can adapt your approach in the exam itself according to the new information presented to you. The rubric quoted above refers to ‘additional research and analysis. The scope of this will vary from case to case. Generally you are expected to do a small amount of research yourself so as to enhance your familiarity with the industry. This should not be extensive; and, if you are working in a group, you will find that you can do it efficiently by allocating specific research tasks to each member and then sharing the output. Your technical knowledge from previous ICAEW examinations is the framework in which to develop your wider business knowledge. Having a good understanding of the areas that are covered will give you the background knowledge ‘with which to assess the particular industry in which the subject company operates. You can buy a good quality business newspaper (eg in the UK the Saturday edition of the Financial Times, which gives an excellent round-up of the week's news), read the Economist or subscribe to a news articles service that you can download directly. There is about a month between the publication of the Advance Information and the exam, and so you «will want to ensure that you are alert to developments in the industry in the run-up to and during this period, itis also important to be aware that, because of print deadlines, the Advance Information actually has to be finalised some weeks before itis published. As a result, you may very occasionally find that a piece of information in the Advance Information is no longer applicable or that a major current item of news affecting the industry is not included — you should include any such additional research as a factor in your answer but not allow it to dominate your answer, 2.4 The Exam Paper (EP) For the exam itself when you arrive at the exam hall, you will be issued with the Exam Paper in the ‘exam hall, comprising 10-15 pages and usually spread across another 5-6 exhibits. This completes the scenario and sets out the exam requirements. ‘The Exam Paper will lke the Advance Information — consist of documents in a variety of formats and with a combination of words and numbers. The numbers will be in a format that is familiar, whether IFRS, national GAAP, management accounts, or some other convention that you will have been given a chance to assimilate in the Advance Information. Like the Advance Information, the Exam Paper comes with a standard rubric (reproduced below) and you should ensure you are familiar with it before you 90 into the exam. i duction othe ae Sty ening Matt ZzPeers Phi 1 When instructed: (@) Check that your question paper contains all the required pages. The Institute's consecutive page numbering may be found under the base line at the foot of each page; (b) Enter your candidate number in the box provided above. 2 Number each page of your answer consecutively using the space provided at the top right of ‘each sheet. Ensure that your candidate number is written on each page of your answer. 3. After the instruction to stop writing at the end of the paper, you will be given five minutes to assemble your answer in this folder. Fasten your complete script inside this folder using the hole in the back page and the tag provided. Do not include your question paper in the folder. 4 Answer folders and examination stationery, used or unused, must not be removed from the Examination Hall. Question papers may, however, be retained by candidates. 5 Your answer must be submitted on the paper provided by the ICAEW in the Examination Hall. Any pre-prepared papers, or papers comprising annotated exhibits from the case material, included in ‘your answer WILL NOT be marked by the examiners. ‘The specific requirement for each exam is set out in the following form (the example provided relates to a report for a client). ‘This suggested time allocation is just that - a suggestion. Different students work in different ways and, by the time you come to the real exam, you should have a method with which you are comfortable, ‘The key point is that all three detailed requirements carry equal weight. It will aso be the case that, ‘other than the main ‘requirements’ exhibit, the new exhibits in the Exam Paper are grouped together in requirement order, with little it any overlap, and so your answer to each requirement can be planned separately and tackled in a discrete way. Finally, it will not normally be necessary to produce any financial appendices for Requirement 3 (any illustrative calculations will be very straightforward) — but the overall time to be spent on it should not be significantly less than for Requirements 1 and 2. The executive summary must also be factored into your scheduling of the four hours (240 minutes), ‘Thus, in overall terms, a possible scheme would be as follows (time in minutes): Exec summary Requirement 1 Requirement 2. Requirement 3. TOTAL = 20 20 Reading and planning 20 60 Calculations = 30 30 ~ 60 Drafting report 30 20 20 50 120 x 2 % 2 20 You will not be able to identify the actual exam requirements from the Advance Information, but good preparation will mean that you will be able to identify the relevant background issues quickly in the =~3.1 exam. You will also be able to decide which parts of the syllabus can be applied to answering the requirements. With your preparation in place, in the exam you will be able to apply your analysis to the requirements that link back to the Advance Information, leaving yourself more time to consider how to use the Exam Paper that you are seeing for the first time. Case Study assessment and the marking key Marks allocation The rubric in the Exam Paper continues as follows, developit ‘Advance Information rubric: some of the guidance given in the Details of the particular skills and attributes that the examiners are looking for under each of the professional skills are set out in the tables below. important for candidates to focus on the fact that it is the evidence of their professional skills that is being assessed. Unsuccessful candidates are likely to produce (or worse still simply reproduce) facts with no analysis or judgement. For each exam, a marking key is developed using the following criteria: ‘There will be five areas in which marks are given: the executive summary; the three detailed requirements; and integrative and multidisciplinary skis (including relevant financial appendices). ‘+ There will be ten Skis Assessment Boxes (SABs or more commonly referred to just as boxes) for each of the three requirements, six for the executive summary and four for integrative and multidisciplinary skils that apply to the docurnent as a whole (two of which are for the financial appendices), ‘+ Across the whole paper, there will thus be 40 boxes, the majority for structuring problems and solutions, and applying judgement. Introduction tothe Case Study Learning Materials3.2 Constructing the marking key ‘The Case Study marking keys are constructed specifically for each exam and use a process called Competency Based Assessment (CBA). The starting-point is the generic competencies that are set out, below and are linked to the assessed skills in the Assessment Grid in the overall Introduction to the Learning Materials. These are lists of all the areas in which professional skis might be assessed in a Case Study exam. However, not all wil be relevant to any given Case Study; the examiners select those that are relevant to ensure that the marking of successive cases Is comparable. Having selected the required competencies for the exam, the examiners will then set out the specific basis on which each competency for each of the five areas is to be assessed. This will comprise a set of possible facts, technical and ethical knowledge, outputs from analysis, implications from the analysis, conclusions and recommendations. FA case studypene) Pee ‘+ Uses the Advance Information (Al), Exam Paper (EP), knowledge of ethical codes and professional experience to define the specific issue/situation Uses own understanding of context and findings ‘© Describes wider context + Identifies business issues = Understanding of business entity — Position in industry sector — Appreciation of ‘wider economy + Recognises where business is in its lifecycle eae Identifies and uses key information Demonstrates technical knowledge Financial statement analysis: = Uses appropriate ‘analytical tools to measure financial performance, identity trends and make comparisons Performs relevant analysis on + Financial statements '¢ Other information = Integrates numbers and words Financial data analysis: — Uses appropriate analytical tools (valuation methodologies, sensitivity analysis) = Performs relevant analysis on © Numerical data ‘© Other information — Integrates numbers and words Uses professional experience Uses relevant strategic analytical tools (SWOT, PESTLE, Porter's Five Forces) Performs relevant analysis Produces quality analysis = Depth — Breadth Logic = Reasonableness Uses knowledge of ethical codes and professional experience to perform relevant analysis Pee rea Builds on implications of analysis * Identifies and uses key financial information Recognises linkages #Priortises key points ‘+ Evaluates options * Discusses output ~ Pros/cons + Demonstrates professional scepticism + Demonstrates objectivity/balance + Demonstrates an appreciation of more than one side/bias + Evaluates options ‘> Evaluates key points Uses knowledge of ethical codes and professional experience Draws conclusions linked to analysis and judgement Makes practical commercial recommendations Introduction tothe Case Study Leaming Materials (REYINTEGRATIVE & MULTIDISCIPLINARY (For the document as a whole) * Provides terms of reference * Provides executive summary consistent with report * Demonstrates appropriate balance between topics Uses sufficient but not excessive sub-divisions Uses appropriate notes and bullets Uses style/language for audience; appropriate tact Avoids repetition © Appropriate appendices — Titled and cross- referenced ~ Clear calculations = No excessive text As there are ten boxes for each of the three requirements, you should ensure that you allow yourself enough time to answer each part of all the requirements in as much detail as you can. A typical allocation of grades i as follows: Cea Peavey Ey een: Executive summary 2 2 6 ‘Overall paper: 2 Appendices 2 TOTAL 40 (Key to professional skills: A&UI = Assimilating and using information; SP&S = Structuring problems and solutions; A) = Applying judgement; C&R = Drawing conclusions and making recommendations) ‘As can be seen from the table above, not attempting one of the requirements has a significantly detrimental effect on your chances of success, as does not submitting an executive summary. In addition to the importance of good preparation, the table clearly demonstrates the ‘cascade’ effect of ‘weak analysis (structuring problems and solutions) and poor judgement, with almost 60% of the boxes available being awarded for these skills. A in particular isa skill with which many candidates struggle: it manifests itself in a number of ways but in the Case Study it usually entails the need to challenge assumptions or to apply professional scepticism to facts and figures supplied by people or entities that may have vested interests (see Chapter 3). Itis likely that the exam requirements will comprise a series of components that interact in a number of ways. For example, you might be required to prepare a report that comprises: ‘* The assessment of current financial information in whole or in part, with or without adjustments ‘+ Anevaluation of a current problem or proposal based on some element of the financial information ‘+ Adiscussion of possible future options, by considering criteria such as the possible benefits and risks and ethical considerations that might be encountered by following such options as part of the business strategy. cease3.3 The marking key woul comprise five sections, being: Executive summary Financial statement assessment Financial data analysis applying professional judgement Strategic and ethical consideration of options Overall paper How are grades awarded? Competency is assessed by reference to four levels in each box: + Clearly competent (CC) ~ candidates have to show that they have understood the requirement and have provided relevant evidence relating to most of the assessment criteria in the box. ‘+ Sufficiently competent (SC) — candidates have to show that they have understood the requirement and have provided sufficient (some or enough) relevant evidence relating to the assessment criteria in the box. ‘+ Insufficiently competent (IC) — candidates have shown only a partial understanding of the requirement and/or provided insufficient evidence relating to the assessment criteria in the box ‘+ Insufficiently demonstrated (ID) ~ candidates have made an attempt to demonstrate the skill required but there is litle or sparse evidence of their understanding of what is required in the box. IF there is no evidence of the competency having been addressed, it will be marked as ‘Not attempted: ‘+ Not attempted (NA) ~ candidates have not provided any evidence to show that they have understood the requirement or demonstrated the skill required. NA means that under that boxs nothing relevant has been provided. Finally your competency for each of the four skills areas is reviewed overall by reference to the guidelines set out overleaf and an overall mark is awarded. The professional skis that are assessed in the Case Study are themselves interrelated. In general: ‘+ If you are not sufficiently familiar with the Case Study information and wider business issues, by definition your assimilation and use of information will be weak and will lead to poor analysis ‘+ Inadequate analysis of the problems and structuring of your solutions will leave you without a proper basis for exercising your judgement ‘+ Ifyou are unable to demonstrate your application of judgement, itis unlikely that you will provide sufficient support for your conclusions ‘+ Without properly developing conclusions, you will have no basis for making your recommendations. In the grades for the overall paper, your integrative and communication skills will be assessed. Make sure that you know to whom you are writing. Having identified your audience, keep it in mind ‘throughout. Each audience will have different requirements and expectations. Regardless of the audience, you will need to: ‘Avoid technical jargon and colloquialisms ~ use simple language Be professional Be succinct Be relevant Be tactful Finally, your report as a whole must answer the requirements that have been set, not those that you ‘would like to have answered. Inv othe CS eaing MattThe professional skill competency demonstrated by a candidate in an answer is assessed broadly in accordance with the following grid: Assimilating and using information Definition of situation Good Reasonable Weak Poor “Use of Al & EP/ethicalframework/own understanding Good Adequate Some Minimal Description of wider context Good _ Reasonable Weak Poor _ Structuring problems and solutions Relevant analysis Good Adequate Weak Poor Depth and breadth of analysis Good __Reasonable Weak Poor Reasonable Weak Poor Integration of numbers and words Applying judgement Links with output/analysis Good Reasonable Weak Poor Evaluation of options/prioitisation of issues Demonstration of professional scepticism _Conclusions and recommendations Linkage to analysis and judgement Good Adequate Weak Poor ‘Appropriate conclusions Good __ Reasonable Weak Poor Practical, commercial recommendations Good Reasonable Some Minimal For examples of how these levels of answer might be achieved by candidates refer to the illustrations of comparative answering techniques shown at the end of each of Chapters 2, 3, 4 as well as those in the ‘Walkthrough’ volume and the other ‘Workbooks’ 3.4 Howis The Case Study will always require you to perform some calculations, though the extent of these will vary from case to case. What will not change, however, is their purpose. With this in mind, the marks awarded for calculations are spread across the professional skills. numerical work rewarded? You could potentially be awarded marks across all four skills areas. For example, if you are asked to calculate an offer price for a business your client is seeking to acquite, you could gain credit (() in A&UI, for applying a P/E ratio from the Advance Information to an earnings figure; (ji) in SP&S, for commenting on your choice of P/E ratio and earnings figure; (ii) in Al, for adjusting this earnings figure for seasonal distortions; (iv) in C&R, for suggesting a price that is logically derived from the foregoing work. You will also score marks for making due reference to this outcome in your executive summary and under ‘Overall paper: Appendices’ for presenting your calculations clearly and stating appropriate workings and assumptions. 3.4.1. What does a marking key look like? ‘An extract from a sample marking key is provided overleaf It relates to the analysis ofthe financial statements of an owner managed business engaged in jewellery sales and pawnbroking, You will see that within the columns of the marking key there are different numbers of boxes indicating the different weightings within this topic of the professional skills being assessed. There are two boxes for A&UI; three for SP&S; three for AJ; and two for C&R. This is a typical weighting of skills assessment for most topics. cues3.4.2 Translation of initial grades to final marks The overall marks are built up from the individual competencies, with marks awarded as follows: Clearly competent. Sufficiently competent Insufficienty competent insufficiently demonstrated Not attempted In order to ensure that the marking of each Case Study is comparable, weigt o-Nee 19 factors are applied to the grades, based on the actual cohort of candidates sitting the exam and calculated individually for each Case Study exam following a reflective process. The result isa final mark out of 100; the pass mark is 50. REQUIREMENT 1 - Review of 1AJ's financial performance ‘ASSIMILATING AND USING INFORMATION Uses relevant Al and EP information Revenue increased by £1,031K (9.496) GP inc from £7,093k to £8,289k/by £1,196k (16.9%) GP increased from 64.6% to 69.0% ‘OP ine trom £1,191 to £1,571k/by £380k (31.9%) (0P% increased from 10.8% to 13.19% STRUCTURING PROBLEMS AND SOLUTIONS Financlal analysis on revenue + Success of overall growth ina recession + Diverse revenuestreams isa business strength + Comments on change instream mix (new | pawnbroking 1) + Growth due to growth in pawnbroking + Comments on seasonality of rtal sales [ya] Co ee] Identifies business issues and wider context, Recession: less disposable income/jewellery a luxury Recession: credit tightened/harder to get bank loans Recession: causes change in consumer behaviour Recession: gold considered safe haven Gold prices: recent price increases (wm research ~ HST/ASB ~ other published resuits he) Co ic 3C rancial analysis on GP/OP + Comments on retail revenue streams GP9% + Pawnbroking has highest GP9% ‘+ Mix as shifted from low margin to high margin streams ‘+ Overheads increased trom 2012 by £75k (13.9%) ‘+ Comments on individual O/H increases over 2012 Cea] [ 1D Te se [xa] (10 ic SC cc] Financial analysis of revenue streams ‘» New jewellery down £363k (17.7%) ¢ Used jewellery up £34k (0.7%) + Scrap/repairs up £30k (1.6%) + Pawnbroking up £1,330k (52.4%) iD ie aa Introduction tothe Case Study Lea‘APPLYING JUDGEMENT Evaluation of financial analysis on revenue Revenue mix protecting business from recession . Revenue mix wil also suit an economic upturn . Branches are interdependent . CCheap jewellery from tertiares supports sales in primaries | « Diverse mix of locations helps overall business . Impact of change in mix on inventory levels. ‘CONCLUSIONS AND RECOMMENDATIONS Draws conclusions (under a heading) ‘Concludes on impact of recession (eg customer behaviout) Diverse revenue streams i @ business strength ‘Concludes on overall revenue growth ‘Concludes on GP%6/0P9% ‘Concludes on revenue stream/mix Consider why no direct costs attributed to pawnbroking | « Na] (0 ic SC cc] [ya] (oD IC <= cc] Evaluation of financial analysis on GP/OP Makes recommendations ‘+ No costs allocated to pawnbroking hence GP% = 100% | * Monitor/control operating costs Maintain diverse revenue streams + Change in mix has postive impact on overall GP + Mainan diverse location mix + Maintained control of COS at atime of growth + Promote high margin seams (pawnbrokng) + Comments on increases in average branch GP Reconsider actual GP% of pawnbroking + Branch GP impacted by transesof used jewellery Other recommendations Co cs] |) ese ET] Financial analysis of revenue streams Revenue streams ar interdependent New Joely: sles Wt by recession Used jewlery: mare popular than new in recession ce + Scrap impactof higher gold prices on scrap se ‘* Repairs: more like to repair than replace in a recession Ic “| ‘+ Pawnbroking: positive impact of recession 1D 7 NA (ya Total | 10 3.5 What is an appropriate grade profile? The range of grades allocated to each requirement varies from paper to paper depending on the subject. matter. To ensure a pass, a candidate should aim to achieve at least 50% passing grades (SC or CC) in each of the requirements. cave Study3.5.1 3.5.2 3.5.3 3.5.4 3.5.5 Applying your knowledge of the Learning Materials Grades available in the Case Study relate to the application of your professional skis and business knowledge rather than to your demonstration of technical skils. Nevertheless, a good technical {grounding is an essential foundation. The Advanced Stage syllabus comprises the following: ‘Assurance and audit Business strategy Corporate reporting Ethies Accordingly, you need to consider the major issues for any business entity in each of these areas, given the entity's stage in its lifecycle. Understanding the stage of the business in its lifecycle Your use of the Advance Information needs to take place at several different ‘levels. Some exhibits ~ such as any industry overviews - are contextual and provide the background for your required output. Others, such as the subject entity's financial statements, will need to be used in much greater detail ‘thers stil, such as alist of the entity's key clients, or an operational schedule, may come somewhere in the middle. However, there is one vital question that you will have to get clear atthe outset, as this will have a pervasive impact on your preparation: at what stage in its lifecycle isthe business? This will determine the appropriate framework for any required discussion of its business strategy, financial strategy or business transformation issues. Understanding the role of the candidate in the case Your role in the case will be as a student in the final year of his/her training contract, which might be in a ‘© Professional accountancy practice = Company outside the accountancy profession ‘You might be either employed or on secondment to a client or another department in your organisation. tis important that you appreciate your required role, as this will provide the appropriate perspective for your exam output. Demonstration of communication skills — executive summary ‘The ‘executive summary’ in the exam is an important part of the report (see Chapter 5 of this Study Manual), so you need to be aware of the main characteristics of an executive summary when you go into the exam. ‘This summary and the financial analysis contained in the numerical appendices (which are rewarded separately) are two items that will almost always be required. These are key features of the Case Study and are covered later in this Case Study Manual. Quality v quantity ‘How much do | have to write in order to pass the Case Study?" Passing the Case Study is nothing to do with how much you write and everything to do with what you write. The alm of the exercise is to keep your script relevant. The longer scripts tend to be those that are padded out with irrelevant material, an inevitable consequence of which is that their authors run out of time to spend on the bits that really matter. Ivoticon te Cs Std ein Matas a3.5.6 Differentiators From previous Case Study exams, the examiners have identified features that regularly distinguish successful candidates from failing ones. Here (in no particular order) are the ‘top ten’ most common differentiators, or ‘critical success factors': + Good planning and strict time management to ensure that the whole exam is completed * Good-quality financial analysis (statement and data) that explains the financial facts derived from the financial information to the appropriate audience and 'makes the numbers talk ‘+ Use of material from both the Advance Information and the Exam Paper (good A&UI) ‘+ Development of analysis through judgement into reasoned recommendations and conclusions © An absence of irrelevant material and the inclusion of innovative (but realistic) ideas + Comprehensive, even coverage of all parts of the requirements ‘© Asuccinct executive summary that covers all of the major issues ‘+ References to economic and industry factors including ethical issues ‘+ Demonstration of professional scepticism and the ability to challenge assumptions ‘+ Application of common sense to ensure proposals are reasonable 4 Preparing for the Case Study The skills you develop through your professional work form an integral part of the skills being assessed in the Case Study exam. In taking responsibility for your skills development programme, you should identity those in your work environment who can to help you: peers, tutors, managers and partners. Identify the areas on which to concentrate your skills revision programme. Make use of the IPD material ‘on the ICAEW website to give you ideas on how to continue to develop these stills. 4.1 Preparing yourself Planning is an essential prerequisite to passing any exam, but especially the Case Study. Planning for the Case Study begins straight after you complete the Professional Stage. Although it is easy to compartmentalise professional lfe into the separate areas of work and study, viewing the two areas as complementary is critical for the Case Study. Your workplace experience should help you to put your preparation for the Case Study into a meaningful practical context. 4.2 Technical and business knowledge Good technical and business knowledge is also the foundation to demonstrating your skills in business and financial analysis. The following are recommended: = Reading VITAL magazine ‘+ Referring regularly to the ICAEW website www.icaew.co.uk, especially any links to Financial Times and other current articles + Seeking opportunities to practise technical skills and accounting techniques in the workplace, questioning colleagues whenever necessary. ‘Specific exercises — which can be done either alone or in small groups ~ might comprise: ‘+ Studying financial statements prepared or audited by your office + Reading due diligence reports prepared by your office in connection with a proposed business acquisition or disposal eo43 44 Analytical skills Sound analysis is the basis for exercising judgement and developing your conclusions and recommendations. It can be broadly divided into two main aspects: * Aconcise overview of the business set in its wider context ‘+ The relevant key components of the issues being covered. You will need to be able to demonstrate your understanding of where the business is placed in its lifecycle and appreciation of the macro issues facing the business in its context. To do this, you should bbe comfortable applying tools for corporate and strategic analysis, such as PESTLE, SWOT ot Porter's Five addressed. Having assessed the wider context, you will then need to analyse the key components of the specific tasks that you have been set. For this part of analysis, you need to be able to: ‘© Select and use the relevant parts of SWOT, PESTLE or Porter's Five Forces '* Incorporate relevant numerical analysis ‘* Integrate your numerical analysis with your written work for a cohesive product. To develop your analytical skills, you should make use of the material in the chapters on ‘Financial Statement Analysis’ (Chapter 2); ‘Financial Data Analysis’ (Chapter. 3); Strategic, Operational and Ethical ‘Analysis’ (Chapter 4). These skills will be assessed in the Case Study and are critical to your success. You will also need to obtain fair and open feedback. Ask for your work to be critiqued and, from the feedback, develop your own analytical process Communication skills Itis important to practise producing as many different types of report as you can, and to read those prepared by professional colleagues. There will be many examples in your office of different types of report. Ask colleagues about how they devised the format and contents and their style. ‘The executive summary is another area where a candidate's different written communication skills are specifically tested, and here you should seek opportunities to read summaries of reports produced in your office. Guidance about executive summaries is given in Chapter 5 of this Case Study Manual Introduction tothe Case Study Learning Materials fA]ceesusyCHAPTER 2 Financial Statement Analysis Overview Introduction Topic List Introduction to financial statement analysis 2 Steps in financial statement analysis Using financial statement analysis in the Case Study ‘Advance Information concerning 4D Exam Paper for 4D. Requirement: Financial Statement Analysis Appendices Examples of answering techniques for 4D Marking grid for 4D Fa)Chapter 2 introduces candidates to the topic of Financial Statement Analysis which is one of the three Case Study exam Requirements. This chapter contains details of the relevant techniques to be understood and developed by candidates in preparation for answering a Financial Statement Analysis question. It also provides a series of important ‘Skills Tips' for candidates to help their preparation and their delivery of a good quality report. ‘There is also a short section on how to improve exam performance in this topic. ‘The chapter also contains a truncated Case Study set of Exhibits as Advance Information and also an Exam Paper concerning the company 4D, based on a previous Case Study exam — which focuses on Financial Statement Analysis. This provides candidates with an opportunity to tackle a substantial Case ‘Study Requirement on this topic based on extracts of the sort of information which would be provided in a full Case Study. Relevant extracts from the 4D Marking Key are provided as well as examples ofa range of answers of differing qualities which candidates might have produced in tackling this requirement. ZB case StudyIntroduction The Case Study exam requires the analysis of a business from a number of different perspectives: ‘+ Financial statement analysis (the subject of this chapter); ‘+ Financial data analysis (see Chapter 3); and. + Operational and strategic analysis, including business trust and ethical awareness (see Chapter 4). These three perspectives form the basis for the three main requirements in the Case Study exam — each of which has an equal weighting. Although this Study Manual covers all three aspects of business analysis, each topic is designed so that it can be studied individually with a separate truncated Case Study being used to illustrate each of the aspects of analysis. However, none of these topics can be viewed independently. They are intertwined because the financial statement analysis ~ the analysis of how the business has been performing in its immediate past informs the financial data analysis — which usually considers a current issue facing the business. The analysis of the business from these two perspectives (past and present) informs, and is informed by, the ‘operational and strategic analysis, which considers the business from the present to the future. The spectrum of financial analysis The object of the Case Study exam is to assess whether you have the appropriate level of professional skills to become an ICAEW Chartered Accountant. One of the primary skills expected of an ICAEW Chartered Accountant is the ability to perform financial analysis on a business. Financial analysis covers a spectrum ranging from an analytical review of the entire published financial statements of an corganisation, through the analysis and consideration of the current viability of a specific project to the assessment of a future proposal. This range of analysis — from analysis of past performance through ‘current assessment to future actions — is all part of the necessary skill of an ICAEW Chartered ‘Accountant. In this Study Manual that financial analysis spectrum is divided into two main components: ‘+ Financial statement analysis — developed in this chapter ‘+ Financial data analysis (see Chapter 3) Franc Saterst rasIntroduction to financial statement analysis Accountancy is frequently referred to as the language of business and in that contest itis an expectation that a qualified member of ICAEW should be able to act asthe skilled translator of ‘the language of business’ into the everyday language of the client or recipient of any work. Within the framework of the Case Study exam evidence of that skil is tested in a number of ways but itis most obviously tested by a candidate's competency in financial statement analysis: the ability to understand, assess and analyse the information contained in a set of financial statements and then present that analysis in a succinct and comprehensible way to the reader. Skills tip ‘Always remember that your financial statement analysis work is to enable you to structure the answer in the Case Study exam by: working from information in the Al, own research and EP (A&UI), through Clearly expressed analysis (SP&S), providing an evaluation of the numerical changes (AJ), and arriving at your conclusions (C&R). Definition of financial statement analysis Financial statement analysis: An evaluation and explanation of the financial and other information. contained in the financial statements ( including summary statements, management accounts, budgets and forecasts) of a business. This analysis covers the financial performance (income statement including SOCIE), financial position (statement of financial position or balance sheet), and cash flow, (cash flow statement). Skills tip In every Case Study, candidates are presented with accounting information in both the Al and the EP. This normally takes the form of management accounts — a practicality to avoid the need to provide unnecessarily detailed disclosures that would be required for a set of IFRS-compliant financial statements. To all intents and purposes, unless otherwise stated, the accounts should be treated as having been drawn up on a rigorous basis by competent financial professionals and suitable for audit purposes. The basis of preparation is not intended to be questioned (unless a specific indicatio given to the contrary, eg, that the accounts have been challenged by the auditors). Steps in financial statement analysis In order to carry out a thorough financial statement analysis there are a series of steps which should be followed to ensure the procedure is comprehensive and complete. In this Study Manual these are developed under the following headings: © Initial analysis * Detailed analysis, including ratio analysis, of the key financial statements * Using financial statement analysis in the Case Study. Before developing these steps further itis important for candidates to understand that the development of the skill of good financial statement analysis is a lengthy process: ths is in terms of both (}) how long it actually takes to perform a single piece of financial statement analysis properly; and (i) the number of financial statements which have to be analysed in order that full fluency’ in this skill can be achieved, case Study21 Skills tip Reading someone else's financial analysis can be deceptive in terms of how difficult or easy that task of analysis was. This is particularly true of financial statement analysis - ‘auditing’ someone else's financial statement analysis can give a false sense of the easiness of the topic. There is no substitute for doing the analysis yourself in order to appreciate the dimensions and difficulty of the work. Ensure that you practice financial statement analysis yourself in order to develop the necessary skills and speed. Initial analysis ‘An initial analysis should establish the financial headlines of the business by way of a rapid review. The aim of the rapid review is to understand and assess the business as a whole and not ignore obvious features. In that rapid review, you should be looking to assess the business by reference to the following criteria. Nature of business * Service sector, retailing, manufacturing or other? + Expanding or contracting business sector? + Impact of technology on this business? Growth + Growing, shrinking or static: where in the business lifecycle? + How is it growing: organically or by acquisition? + Making good profits, marginal profits or losses: how much, when? + Stable or erratic performance: spurts of growth and plateaux? Size ‘+ Small, medium or large: using what criteria? + Asingle company or group: national or intemational? + Quoted or unquoted: what are the volumes of shares issued? Stability + Financially well-structured; mix of debt (long-/short-term) and equity? + Solvent: able to meet its current liabilities? * With a good life-expectancy: is it starting up, expanding financially or declining? With achievable budgets and forecasts ~ in line with strategic direction? jer context Economy: recession or recovery? Inflation or stagnation? Availabilty of finance: banking constraints; (quantitative easing)? Fiscal policy: stimulation for reinvestment or restrictions (tariffs)? Having conducted the initial analysis you should have gained a comprehensive overview of the business and will be in a position to start to consider its financial strengths and weaknesses. However, iti important to make sure that from the beginning you integrate your analysis and therefore you should always be aware of the wider context in which you are conducting your review. From initial analysis a business may appear to be shrinking (and therefore possibly failing) but if the whole economy is falling into recession and this business is shrinking less rapidly than other then itis probably not failing! Skills tip Try to avoid making generalised judgements from lazy first impressions. The fact that the economy is currently in recession (or experiencing a weak recovery) Is not necessarily the reason for the poor results being achieved by the company you are analysing. There may be a more pertinent and potentially more concerning reason which you must be able to discern as part of your objective analysis. Franc Steen ras2.2 Detailed analy: The next step is to make a more detailed analysis ofthe financial statements. This involves examining and explaining the information provided in each of the three key documents (together with the detailed motes) and breaking that analysis down into individual components: ‘+ Income statement (including SOCIE): how is the business performing? What are the key elements. of its results: revenue trend; sales mix; related costs; gross profits; operating profits; any overall losses, surpluses or deficits? This income statement analysis is developed further below. + Statement of financial position (balance sheet): Is the business financially table? Establish its financial position by analysis of the balance sheet components: net assets; net current assets; gearing; capital structure; quality of assets; nature of liabilities and the balance sheet ‘quadrant’. (The quadrants are (1) current assets; (2) current liabilities; (3) non-current assets and (4) equity and non-current liabilities. Of particular concer is any shortfall between the amount invested in (G) non-current assets and their financing by (4) the long term funding). ‘Statement of cash flows: Is the business generating or using cash? Why? What Is the relationship between the results and the cash generation/usage? Skills tip Remember the inter-connectivity between the three statements and the effect of the (sometimes subjective) key "bridges’ between them particularly between the income statement and the balance sheet. These ‘bridges’ include items such as: closing inventory including work in progress; depreciation ‘or amortisation of assets; deferred income and provisions (such as impairment of accounts receivable or doubtful debts) ~ all of which affect reported profit, but candidates should always evaluate the assets of a similar class shown in the balance sheet (if material). In your analysis of these three key documents you need to break your analysis down into individual ‘components. The specific questions that you need to ask (and be able to answer) are detailed below. Ratio analysis Basic ratio analysis should be considered in the same category as a PESTLE or SWOT review (see Chapter 4); very useful but only as a starting-point for further analysis and that all-important written ‘commentary. Ratio analysis provides a logical pathway to be followed in the analysis and review of figures in financial statements and you must be able to calculate the basic groups, or families, of ratios {or profitability, liquidity, ROCE, financial structure and asset efficiency — and to calculate them at speed and with accuracy. Ratio analysis permits comparisons to be made: Between current results and past results Between current results and forecasts/budgets Between the results of the business and some external or industry standards Between the results of one subsidiary and those of another ‘Across business segments or revenue streams within the organisation Between the company under review and a rival or takeover target Alter you have performed the relevant comparative calculations, the real skill isin explai results mean (SP&S) ~ and to evaluate what might have caused any changes (A)). ing what those Income statement analysis — including the SOCIE In developing your detailed analysis of the financial statements the key issues in income statement ‘analysis concern financial results and financial performance. The main questions to be considered (and answered) are: + What is the trend in revenue: if rising, how achieved; or if falling, caused by what? + What are the significant changes in sales mix or revenue streams? What isthe effect of changes in the sales mix on overall profitability? ze coe‘+ What isthe trend in gross profit: rising or falling: in absolute or gross profit % terms? Are the margins the same for different products? ‘+ Whats the pattem of costs against revenue: are they rising or falling? What is causing any inconsistency? ‘+ Which costs appear to be fixed and which variable: what is the operational gearing for the business? + Are there any material anomalies in any single key cost figures? + Isthe level of operating profit and profit before tax being achieved satisfactory and stable? Are the profits increasing or decreasing? + Is there consistency one year with another of the ‘bridging’ items between income statement and. balance sheet? How material are the following items: = Closing inventory? Depreciation and profits or losses on disposals? ~ Deferred income? = Impairment of accounts receivable: provisions made for bad and doubtful debts? = Accruals and prepayments? ‘+ Is the tax charge reasonable? * Is the dividend policy understandable and consistent? The above list would enable a structured analysis of the components in the income statement from the AA, and the analysis could be expanded if more detail is provided or contracted if only summary information is provided. Statement of financial position (or balance sheet) analysis In developing another component of detailed financial statement analysis the key issues in balance sheet analysis are to assess a business's financial position, consider the quality of its assets and liabilities, and conclude on whether the balance sheet is strong or weak. ‘As well as calculating the usual ratios against relevant income statement components (such as the ‘number of days sales in accounts receivable and other similar standard ratios) the key issues in the detailed balance sheet analysis concern financial position, content, structure and stability. ‘The main questions to be considered (and answered) are: © Do the ‘quadrants’ of non-current assets and long-term funding appear balanced? Note: ‘quadrant analysis’ can easily identify if non-current assets are being funded by current liabilities (short-term credit). ‘+ What isthe quality of the non-current assets: largely tangibles such as equipment (or buildings with a clear market value) or mostly intangibles such as goodwill (can these be sold in a crisis)? What might be an independent market value of these items? * Does the majority of the long-term funding comprise share capital and retained earnings, or is it ‘mainly long-term debt (and therefore more risky)? Is that debt ‘soft’ ~ directors’ loans; or ‘hard! ~ external funding with a high rate of interest and a short redemption date (how short)? * Do the ‘quadrants! of current assets and current liabilities appear in balance? If not, would you consider this to be appropriate given the nature of the business? + What is the quality of the current assets and how liquid are they? Do they comprise mainly inventory and slow paying accounts receivable, or isa sufficient quantity of cash or near cash’ available? + Are the current liabilities ‘softer’ ~ trade payables and accruals; or ‘harder’ - bank overdrafts and non-negotiable liabilities for items such as taxes (including VAT, payroll and social charges, and. corporation tax)? The above list would enable a structured analysis of the components in the balance sheet from the Al, and the analysis should be expanded to include the notes to the accounts where more detail is provided (such as on non-current assets). Fnac Seer is >|Statement of cash flow analysis, In conducting the detailed analysis of the financial statements an analysis of the statement of cash flow provides an opportunity to review ail aspects ofits financial operations. Itis important to understand that although the statement of cash flows combines information from the income statement and the balance sheet, itis not simply the ‘third financial statement! but instead might be considered to be the real starting point in the financial statement analysis of a business. ‘Overall, what the cash flow statement tells you is how the business is being managed in financial terms atall levels. Each line on the statement is significant in providing information about financial activities and the financial management of a business at diferent levels from credit control (cash generated {from accounts receivable) to board-level decisions (purchase of non-current assets; payments of dividends). ‘The main questions to be considered (and answered) may include: ‘© How successful isthe business in generating cash from its operations? This starts with analysing the operating profit after adding back the non-cash items. ‘+ Is the working capital being managed in line with the increase/decrease in business activity? Is cash being soaked up by (unmanaged) increases in accounts receivable or inventories? Are accounts payable being managed effectively and responsibly? ‘+ Isthe business earning an appropriate return on its investment? Is it paying out significant sums on the servicing of finance? + What has been the cash flow impact of payments for taxation? Are the payments consistent with the liability? + What is the company policy on capital and financial investment? Is there an appropriate non- current asset replacement policy? Is it being properly funded by long-term funding (equity ot loans)? + What are the strategic implications of the activities conducted by subsidiaries and associate ‘companies? ‘+ Is the policy on dividends appropriate? Can the business afford the payments? ‘© Whats the company’s long-term financing strategy and is it appropriate for the business? ‘© Isthe company making best use of its liquid resources? ‘+ What is happening to the cash balances in the business? Are the balances undulating? How much is being held? ‘The above list would enable a structured analysis of the components (each line) of the statement of cash flows as well as the change from the opening to the closing cash balance. Skills tip Given that itis not possible to predict the EP and what the actual analysis might be that you are required to undertake, or in what detail, you must prepare yourself accordingly — and 'know your enemy’ completely. You must know the financial story that the components of the main financial statements are telling and be prepared to explain that story in whatever way might be requested.3 Using financial statement analysis in the Case Study The Al and, toa lesser extent, the EP, contain a very large amount of financial statement information which has to be understood and analysed by candidates. The skill of financial statement analysis is critically important in the Case Study — it is also seen as a crucial skill for any candidate hoping to become a member of ICAEW. As a result of this emphasis and given the quantity of information and the preparation time available, candidates should expect to have to answer detailed financial statement analysis questions to a high standard in this exam. This means demonstrating not just mathematical ability but good analytical, evaluation and communication sils as well ‘The appendices of the weaker Case Study candidates can be full of pages of mathematically correct, ratios ~ demonstrating that candidates can cope with this basic skill - and points are awarded in the box assessing the appendix for mathematical accuracy. However, the assessment of financial statement analysis skills in the exam is focussed much more on ‘your ability to demonstrate how well you can understand the financial statement(s) under review and how well you make sense of, and can communicate the reasons for, the changes in the numbers. In order to maximise your success in financial statement analysis in the exam you should always answer the Requirement as presented, but bear in mind the following: Focus on what has happened in the key areas: ‘+ Financial performance: success or decline - Income statement including SOCIE ‘+ Financial stability and debt - Statement of financial position (balance sheet) + Cash balance and change — Statement of cash flows Consider the effect of: Business scenario changes - How do the issues/changes affect the financial statements? Wider context impact - How does the wider context affect the financial statements? Making adjustments — Remove one-off items, including acquisitions/disposals ‘Segmenting the information — Slice and dice'; break the numbers down into components Using professional scepticism ~ What judgements have been exercised; appropriately/ethically? In particular in all analysis ask: © Why?—The elements in your financial statement analysis req ‘+ So what? - What does this mean to the business or the analysis? + Like for like? - Consider adjusting for any major non-recurring items or changes in the business an explanation What is the purpose of the financial statement analysis? + Add knowledge - Tell the readers of your report something they do not appear to know ‘+ Add understanding — Explain the more technical features of the financial statements succinctly © Add value ~ Offer a way forward by evaluating, concluding and recommending from your work © Communicate ~ Provide evidence of your analytical skill and financial fluency by writing your report in a language that the reader will understand. Skills tip Provide compelling evidence of your financial statement analytical skills and financial fluency by writing your report in language that the reader will understand. Fancl aterest ys i”