[Interview - Group- Review] Một số case study Deloitte

Introduction:
Discuss in your group and be prepared to share your responses to the interviewers
(You have 20 minutes for complete requirements 1 and 2)
Have the group presentation in next 10 minutes
Have the group answer the follow up questions by interviewers in 10 minutes
Case study 1:
Bengal is a public company. Its most recent financial statements are shown below:

Additional information:

 There were no disposals of non-current assets during the period; however Bengal does have some non-current assets classified as 'held for sale' at 31 March 20X1.
 Depreciation of property, plant and equipment for the year ended 31 March 20X1 was
$640,000.
 A disappointed shareholder has observed that although revenue during the year has
increased by 48% (8,250 / 17,250 × 100), profit for the year has only increased by 20% (500/2,500 × 100).
Required: Comment on the performance and financial position of Bengal for the year ended 31 March 20X1.

Answer:

It is correct that revenue has increased by 48% while profit for the year has only increased
by 20%. However, on closer inspection, we can see that thi s is to a large degree attributable to the tax charge for the year. The tax charge was 28.6% of the profit before tax in the year ended 31.3.20X0 and 42.8% of the profit before tax in the year ended 31.3.20X1. We do not have a breakdown of the tax charge but it could include underpayments in previous years, which distorts the trading results.

A better comparison between the two years is the profit before tax % and the gross profit
%. Both of these are higher in 20X1 than in 20X0. The shareholders will also be interested in the ROCE. There has been a significant increase in capital employed during the year ended 31.3. 20X1. Bengal has acquired nearly $13m in tangible and intangible assets, financed from cash reserves and a new issue of 8% loan notes.

An additional $2m of non-current assets have been reclassified as held for sale. This
suggests that Bengal has taken over the trade of another business and is disposing of the
surplus assets. This is a long-term project which may take time to show a return and the
ROCE does show a significant drop in 20X1. However, if we disregard the loan capital and
look at the ROE we can see a considerable increase in 20X1.

The increase in loan capital does have significance for shareholders. The interest charge has increased from $100,000 to $650,000, which reduces the amount available for dividend. Gearing has increased significantly. The rate that Bengal has to offer to loan note holders has already increased from 5% to 8%. If it required further borrowing, with this high gearing, it would have to pay substantially more. Shares in Bengal have become a riskier investment. One indicator of this is the interest cover, which has fallen from 36 times to 9 times.

The acquisition could presumably have been financed from a share issue or share exchange, rather than loan capital. However, this would have diluted the return available to
shareholders.

The area in which there is most cause for concern is liquidity. As we can see from the
statement of cash flows, cash and cash equivalents have fallen by $4.2m and the company
is now running an overdraft. It has tax to pay of $2.2m and this will incur penalties if it is not paid on time. The current ratio has declined from 2.1:1 to 1.5:1 and this is including the
non-current assets held for sale as part of non-current assets.

The quick ratio, excluding inventory and non-current assets held for sale, indicates the immediate cash situation and this shows a fall from 1.6:1 to 0.46:1. Bengal needs to remedy this by disposing of the non-current assets held for sale as soon as possible and selling off surplus inventory, which may have been acquired as part of the acquisition.

Overall, the shareholder should be reassured that Bengal is profitable and expanding. The
company has perhaps overstretched itself and significantly raised its gearing, but it is to be hoped that the investment will bring in future returns. This is no doubt the picture the
company wants to give to shareholders, which is why it has paid a dividend in spite of
having very little cash with which to do so.

Case study 2:
SME A gives warranties at the time of sale to purchasers of its product. Under the terms of
the contract for sale SME A undertakes to make good, by repair or replacement, manufacturing defects that become apparent within one year from the date of sale. On the
basis of experience, it is probable (ie more likely than not) that there will be some claims
under the warranties.

At 31 December 20X1 SME A appropriately recognized CU50,000 warranty provision. SME A incurred and charged CU140,000 against the warranty provision in 20X2. CU80,000 of this related to warranties for sales made in 20X2. The increase during 20X2 in the discounted amount recognized as a provision at 31 December 20X2 arising from the passage of time is CU2,000.

At 31 December 20X2 SME A estimated that it would incur expenditures in 20X3 to meet its warranty obligations at 31 December 20X2, as follows:
 5 per cent probability of CU400,000
 20 per cent probability of CU200,000
 50 per cent probability of CU80,000
 25 per cent probability of CU20,000.

Assume for simplicity that the 20X3 cash flows for warranty repairs and replacements take
place, on average, on 30 June 20X3.
An appropriate discount rate is 10 per cent per year. An appropriate risk adjustment factor
to reflect the uncertainties in the cash flow estimates is an increment of 6 per cent to the
probability-weighted expected cash flows.

SME A is also the defendant in a breach of patent lawsuit. Its lawyers believe there is a 70
per cent chance that SME A will successfully defend the case. However, if the court rules in favor of the claimant, the lawyers believe that there is a 60 per cent chance that the entity will be required to pay damages of CU2 million (then amount sought by the claimant) and a 40 per cent chance that the entity will be required to pay damages of CU1 million (the amount that was recently awarded by the same judge in a similar case). Other amounts of damages are unlikely. The court is expected to rule in late December 20X3. There is no indication that the claimant will settle out of court. A 7% risk adjustment factor to the cash flows is considered appropriate to reflect the uncertainties in the cash flow estimates. An appropriate discount rate is 10% per year
Require: Prepare accounting entries to record the provision in the accounting records of
SME A for the year ended 31 December 20X2.
Answer:

In 20X2

To recognize the unwinding of the discount in 20X2 on the warranty provision recognized at 20X1.

To recognize expenditure on warranties in 20X2. At 31 December 20X2

To recognize the warranty provision at 31 December 20X2.

The calculations and explanatory notes below do not form part of the answer to this case
study:

a) Balance at 31 December 20X1 of CU50,000 plus the increase in that amount due to the
passage of time of CU2,000 = CU52,000
b) An additional profit or loss charge relating to 20X1 warranties because the provision
made was CU52,000, but the actual amount incurred and charged relating to 20X1
warranties was CU60,000 (Total amount charged in the year less that relating to warranties for 20X2 sales = CU140,000 less CU80,000 = CU60,000), ie CU60,000 less CU52,000 = CU8,000
c) Carrying amount of the warranties provision at 31 December 20X2:

d) Probability-weighted expected cash flows:

Case study 3:
ABC is an electronics company. In the past day, the company made three contracts as
follow:
1. ABC sells a video game disc for use with a popular games console for CU1,100. The video game offers standard ‘offline’ gameplay as well as functionality to play the game ‘online’ for a one-year period. The game disc and the online gaming service are not sold
separately.
2. ABC sells a product to a customer and promises to perform a maintenance service in the
first year. The contract requires the customer to pay CU 10,000.
3. ABC sells a mobile phone and unlimited calls to Customer A on a 24-month contract.
Customer A pays CU30 per month for the network service and the mobile phone is
‘free’. The company sells to Customer B the same mobile phone for CU 240 and the
same network service for CU 20 per month. Those amounts are also the prices that the
company charges when a mobile phone or a network service is sold separately.
The effects of the time value of money are ignored in this example.
Require: According to IFFRS 15 Revenue from contracts with customers, how is the revenue recognized?

Answer:

1. The game disc and the online gaming service are separate goods and services promised
in the contract and are accounted for as separate performance obligations. The
company allocates the consideration of CU 100 to the game and online gaming service
in proportion to their stand-alone selling prices, which would be estimated because
those prices are not observable. Consequently, the amount of consideration allocated to
the game is recognized as revenue when the game is transferred to the customer and
the amount of consideration allocated to the service is recognized as revenue over the
one-year period as the online gaming service is provided.

2.The company accounts for the promise to transfer the product and the maintenance
service to the customer as separate performance obligations. The company allocates
the consideration of CU 10,000 to both the product and the maintenance service on the
basis of their relative standalone selling prices. Therefore, the amount of consideration
allocated to the product is recognized as revenue when the product is transferred to the
customer and the amount of consideration allocated to the maintenance service is
recognized as revenue when that service is provided.

3. The amount and timing of revenue recognition would be the same for both contracts
with customers. This outcome faithfully depicts the fact that the company’s
performance is the same in both contracts because the company transfers the same
phone and same network service to each customer. In both contracts, the customer has
promised to pay a total of CU 720 for the mobile phone and the 24 months of network
services. This amount of consideration is allocated to the mobile phone and network
services in proportion to their stand-alone selling prices. Consequently, in both
contracts, the company recognizes revenue of CU 240 when the mobile phone is
transferred to the customer and CU 20 as each month of network service is provided.

Case study 4:
Lily Window Glass Co (Lily) is a glass manufacturer, which operates from a large production facility, where it undertakes continuous production 24 hours a day, seven days a week. Also on this site are two warehouses, where the company’s raw materials and finished goods are stored. Lily’s year end is 31 December.
Lily is finalizing the arrangements for the year-end inventory count, which is to be
undertaken on 31 December 20X2. The finished windows are stored within 20 aisles of the
first warehouse. The second warehouse is for large piles of raw materials, such as sand,
used in the manufacture of glass. The following arrangements have been made for the
inventory count:
1. The warehouse manager will supervise the count as he is most familiar with the
inventory. There will be ten teams of counters and each team will contain two members
of staff, one from the finance and one from the manufacturing department. None of the
warehouse staff, other than the manager, will be involved in the count.
2. Each team will count an aisle of finished goods by counting up and then down each
aisle. As this process is systematic, it is not felt that the team will need to flag areas once
counted. Once the team has finished counting an aisle, they will hand in their sheets and
be given a set for another aisle of the warehouse. In addition to the above, to assist with
the inventory counting, there will be two teams of counters from the internal audit
department and they will perform inventory counts.
3. As Lily undertakes continuous production, there will continue to be movements of raw
materials and finished goods in and out of the warehouse during the count. These will
be kept to a minimum where possible.
4. The level of work-in-progress in the manufacturing plant is to be assessed by the warehouse manager. It is likely that this will be an immaterial balance. In addition, the raw materials quantities are to be approximated by measuring the height and width of the raw material piles. In the past this task has been undertaken by a specialist; however, the warehouse manager feels confident that he can perform this task.
Required: For the inventory count arrangements of Lily Window Glass Co:
 Identify and explain deficiencies; and
 Provide a recommendation to address each deficiency.
Answer: