Strategic Business Management July 18 Mark Plan

Strategic Business Management – Advanced level – July 2018
MARK PLAN AND EXAMINER’S COMMENTARY – Advanced Level: SBM July 2018
This report includes:

 a summary of the scenario and requirements for each question
 the technical and skills marks available for each part of the requirement
 a description of how skills should be demonstrated
 detailed points for a full answer
 examiner’s commentary on candidates’ performance
The information set out below was that used to mark the questions. Markers were encouraged to use discretion and
to award partial marks where a point was either not explained fully or made by implication.
Question 1 – Analytics Business Services Ltd (ABS)
Scenario
ABS is a global provider of digital information and data analytics services for business and medical customers. It is
owned by a private equity firm. ABS has two separate divisions: the Business Analytics Division and the Medical
Analytics Division.
The candidate works in ABS’s strategy and risk management department (SRMD).
ABS has expanded rapidly, but it is now considering its exposure to risks and there are a number of other issues
which candidates are asked to address as follows:
 A small company DS was acquired, mainly for its intellectual property rights over bespoke software (Max). The
integration of DS into the group has not gone well and DS is making losses. ABS is now considering disposing
of the DS shares or its assets.
 An issue was identified by internal audit regarding a cyber-attack and data security.
 The treasurer was removed recently. An inspection of his files and documents revealed problems with some
foreign currency hedging transactions he had undertaken.
 An ethical issue has arisen where a senior colleague was using an ABS data analytics program for private
business purposes.
Mark Grid
Requirements Technical & Skills assessed

Skills
(1) Identify and evaluate the key risks 14  Use judgement to identify and evaluate key
facing ABS and explain how each risk risks
could be mitigated.  Demonstrate a clear understanding of the
nature of the risks and select appropriate risk
Include an analysis of the data mitigation factors
provided in Exhibit 1 to identify risks.  Analyse the quantitative impact of risk factors
Ignore the specific matters arising in  Assimilate data and other information to
Exhibits 2, 3, 4 and 5. capture wide range of different implied and
explicit risk factors
@ICAEW 2018 Page 1 of 22

(2) In respect of DS: 16  Assimilate data at time of acquisition, and

currently, to assess movement in value.
(a) explain the factors to be considered  Perform calculations and determine values of
in valuing the DS shares for a goodwill and other assets
possible disposal. Suggest and  Use judgement to assess the impact of losses
justify an appropriate disposal value on valuation.
for the DS shares; and  Identify embedded factors affecting valuation.
(b) set out the financial reporting  Structure financial reporting treatment between
treatment in the ABS group financial sale of asset and sale of shares
statements and, where relevant, in  Set out and explain the financial statement
the individual company financial treatment at group level and individual
statements for ABS and DS of the company level.
disposal of:  Address the key financial reporting issues
 the Max software asset arising from the disposal including the
 the DS shares. measurement of intangible assets.
Consider the financial statements for
the year ended 30 June 2018 and
future accounting periods.
(3) Explain the issues that should be 9  Use judgement to select and explain the key
considered with respect to the causes risks arising from cyber-attack.
and consequences of the cyber-  Structure the information to set out and
security incident reported by the distinguish causes and consequences of
internal audit department (Exhibit 3). cyber-attack.
Recommend actions that should be  Use judgement to identify the issues with third-
taken to provide the ABS board with party service providers in relation to a cyber-
greater assurance over cyber security. attack.
 Set out and justify clear recommendations.
(4) In respect of the transaction which is 9  Identify and explain issues relating to foreign
set out in Claude’s notes (Exhibit 4), currency risk including implications for profit.
explain:  Demonstrate a clear understanding of a money
market hedge.
(a) the appropriate treatment in  Critically appraise the nature and
the ABS financial statements consequences of the scheme set up by Claud
for the year ended 30 June
and explain the risk implications.
2018;
(b) its nature; consequences in  Demonstrate an understanding of the key
financial terms, including the procedures and instruments for managing
implications for risk and foreign currency risk using a money market
internal controls; and hedge.
(c) a hedging arrangement,  Perform foreign currency risk management
including calculations, that calculations using in the data provided, and the
would have been a preferable methods suggested.
alternative to Claude’s  Explain the appropriate financial reporting
transaction. treatment of the transaction by Claude.
(5) Explain the potential ethical 7  Use ethical language and principles.
implications of the issues identified for  Identify key ethical issues presenting a
ABS and for Helen (Exhibit 5). Set out balanced approach to interpreting the facts
and justify the actions that I should and incentives.
now take.  Set out the actions to be taken by relevant
parties.
Maximum marks 55

Examiner’s comments
Requirement 1 – Key risks
There was a good performance on this requirement, with many candidates performing well.
Better candidates structured the quantitative data in a table to identify risks and also applied the qualitative
information in the question to identify further risks. Mitigating factors were described in reasonable detail and
linked to each risk.
Most candidates recognised several risks facing ABS including key risks such as foreign currency,
competition and the risks to cyber security They were then able to identify and describe corresponding
mitigating factors.
Weaker candidates had a number of shortfalls in their approach including the following:
 focus on a performance analysis, rather than risk analysis
 numbers were calculated, but not used to support risk analysis
 focus only on risks relating to the data and ignoring qualitative risks
 focus only on qualitative risks and ignoring any risks relating to the data
 each mitigating factor not linked to each risk (ie bundling risks and then bundling mitigating factors)
 failing to provide any mitigating factors and only focus on the risks themselves
 generic risks were suggested, rather than scenario specific risks
 mitigating factors were exceptionally brief such as “hedging”, “keep up with competitors” and “ensure
information is protected”. As such, they failed to demonstrate understanding
 a very limited number of risks identified.
Requirement 2 – Disposal of DS
For most candidates this was one of their weakest requirements on the paper, but there were also some good
answers.
2(a) Valuation
Many candidates were unclear of their approach and just regurgitated various valuation techniques without
being able to aim their legitimacy at this particular scenario and requirement.
The lower scoring answers discussed the different valuation methods without displaying the relevant
applications skills. Some failed to even consider the existence of the intangibles. Many concluded that a
suitable valuation was £480,000 which was equal to the selling price of Max, without considering whether this
was actually realistic or the fact that the Max asset is becoming outdated which may influence the future
selling price. Many also omitted to mention other net assets that DS might own.
Surprisingly, a lot of candidates did not mention the fact that the selling price would be strongly influenced by
the fact that DS was making losses and that this was a key factor in considering net asset valuation methods.
Other weaknesses displayed by a significant number of candidates were:

 Discussion of valuation methods, but not suggesting a specific valuation, as required by the question
 Considering the software (Max) valuation or (historic) net assets, but not both.
 Describing in detail and recommending using earning-based valuation models when DS has been making
losses
2(b) Financial reporting for DS disposal
This was a poorly answered requirement by most candidates.
Many failed to address systematically each of the required components: (a) shares v asset sale (b) group
accounts v individual company accounts. Instead, they created their own “merged” answer, which confused
some, or all, of these components.

A surprising number of candidates stated that the internally generated intangible asset should be recognised
in both the individual and group financial statements.
Other weaknesses displayed by a significant number of candidates were:

 Treating the disposal as having occurred in the year ended 30 June 2018, whereas the current date in the
scenario was already past that date and the disposal had not yet happened.
 Calculating goodwill as £7.64m (ie not including identifiable intangibles)
 Some referred to IFRS 5 in respect of the year ended 30 June 2018.
 Impairment was overlooked.
 For the disposal of the asset in individual company accounts, many candidates stated that, as the asset is
not recognised, there is no FR effect of the disposal at all.
 Poor financial reporting knowledge, with confusion demonstrated about the correct treatment of the
shares/assets disposal.
Requirement 3 – Cyber security incident
This requirement was reasonably well attempted, with many candidates producing good answers.
Many candidates made a good attempt at using the scenario to generate a range of causes and
consequences, reaching some practical recommendations. Most also identified that this was a business risk,
not just an IT risk, and had wider implications for the organisation.
Weaker candidates did not discuss the specific issues in the scenario, and simply launched into a list of
generic IT control solutions without making reference to the specific facts of the case. This produced a
wooden text-book approach that could apply to any cyber-attack, but were not directly related to the scenario
of a data analytics services company.
Requirement 4 – Foreign currency hedge
Candidates generally understood that this was an attempt at a money market hedge and could talk around the
risks that it was aiming to mitigate. Most noted that this type of hedge was appropriate.
However, relatively few could clearly articulate the financial reporting treatment. Many seemed to go into auto
pilot and describe various aspects of hedge accounting, often in some detail. They failed to spot that hedge
accounting was not appropriate in this case as there was no hedge documentation in place. The FR treatment
was actually straightforward, but it required a little thought to scope the answer widely enough to address all
aspects of the transaction: (i) the receivable (ii) the euro loan; and (iii) the deposit. With a little thought and
some core FR knowledge, this section of the requirement should have resulted in a good mark.
The element of the question on risk and internal controls was variable. However, surprisingly frequently, the
internal control element was either omitted completely or answers were very brief stating for example
“segregation of duties is needed”.
The alternative hedge requirement was performed well by many candidates. Some recomputed the money
market hedge with new figures. A high number of candidates arrived at the correct answer (subject to
rounding errors). Credit was also awarded to candidates who demonstrated other approaches to hedging
(such as forward contracts).
Requirement 5 – Ethics
Mixed responses were received to the ethics element of the question, but there was some improvement on
previous sittings.
Weaker candidates adopted the transparency/effect/fairness (TEF) framework in a rather wooden manner.
There was tendency to give equal emphasis to each of these principles, rather than selecting and
emphasising those most relevant ethical principles to the circumstances in the question – which are not

necessarily covered by TEF. In so doing, the scenario was often squeezed into the framework, rather than the
framework being used flexibly to elucidate the issues in the scenario.
In terms of content, many candidates departed from the scenario referring to the ethics partner in an
accounting firm, whereas the candidate is employed by ABS in the scenario. Similarly, there was a frequent
approach of discussing resignation from the engagement, not appreciating the fact that the scenario did not
involve acting for a client.
Not distinguishing between using a programme and accessing data was also a general issue – although the
question of whether data was also accessed was recognised by good candidates.
Weaker candidates ignored the potential legal issue and the need to seek legal advice over this matter.
Particularly, advice regarding the potential conflict between the duty to disclose and the duty of confidentiality.
The majority did correctly recommend that the board should be informed.

(1) Risks
Business Analytics Medical

Revenue 2018 2017 2018 2017
UK-based 816 612 192 256
US-based - - 448 336
Eurozone-based 544 408 - -
Total revenue 1,360 1,020 640 592
Operating profit 272 255 64 89
Customers 876 732 246 240
New customers 232 122 30 25
Lost customers (88) (192) (24) (19)
Revenue from largest customer 97 112 57 15
% revenue from division 68% 63% 32% 37%

% operating profit from division 81% 74% 19% 26%
% operating margin 20% 25% 10% 15%
% forex 40% 40% 70% 57%
% revenue for largest customer 7% 11% 9% 3%
Revenue per customer £m 1.55 1.39 2.60 2.47
% change revenue
UK-based 33.3% -25.0%
US-based - 33.3%
Eurozone-based 33.3% -
Operating profit % change 6.7% -28.1%
Customers % change 19.7% 2.5%
Future risks from the data
Risk Nature and evaluation of risk Risk mitigation
Competition risk It is a highly competitive and changing  Anticipate and adapt to changes
market where competitive advantage is in technology and markets.
contestable and temporary.  Stay close to existing customers’
In 2018, Business Analytics increased evolving needs by relationship
customer numbers by 19.7% despite losing marketing and frequent dialogue.
12% of the customers it had at the end of  Marketing and market awareness
2017. to seek out new customers.
Medical Analytics only gained 2.5% in  Invest in new technologies and
customer numbers, but lost 12% of the infrastructures
customers it had at the end of 2017.  Expansion of the business may
Customer switching is therefore a major compensate for lower operating
risk. profit margins (as occurred for
The fall in operating margins of both Business Analytics in 2018)
divisions reflects the risk of increased
competition on operations as well as on
sales.

In 2018 Business Analytics’ operating

margin fell from 25% to 20% and Medical’s
from 15% to 10%. Increases along this
trend in future may remove operating profit
entirely.
Foreign currency risk Business Analytics Division earned 40% of  Hedge operational currencies
its revenues in euro in 2018. against sterling
Medical Division earned 70% of its  Consider incurring more costs in
revenues in US$. euro or US$ (eg borrowing in
If the £ strengthens then foreign currency these currencies) as a natural
earnings would fall in value in £ sterling hedge
terms.  Widen span of sales
 Consider developing foreign
operations
 Invoicing in sterling if acceptable
to customers
Data regulation risk Increase in government regulation in UK  Monitor legal changes, particularly
(or US or Eurozone countries) could prior to new investment.
increase costs, amendment to business  Take legal advice on a regular
model (eg on personal data retention, such basis
as GDPR).  Consider developing foreign
If regulation differs between jurisdictions operations.
there may be a competitive disadvantage
compared with foreign operators.
Intellectual property Products and services include and utilise  Trademark, copyright, patent and
intellectual property content. There is a risk other intellectual property laws to
that intellectual property rights could be protect proprietary rights in
challenged, limited, invalidated or intellectual property.
circumvented, which may impact demand  Subscription contracts with
for, and pricing of, products and services. customers to contain restrictions
Laws can be subject to legislative changes on the use of proprietary content.
and increased judicial scrutiny. This
creates uncertainty in protecting
proprietary rights.
Brexit and other Changes in international trading  Monitor developments in

foreign trade regulations (including Brexit) may create regulations
regulations and tariffs regulatory or tariff barriers to cross-border  Where appropriate lobby
sales and operations. governments and regulators
Industry dependence The Medical Division made up almost one  Consider expansion of Medical
– medical third of sales in 2018 and is dependent on Division into other countries (eg
a single industry. It is also only diversified Eurozone)
across only two countries.  Monitor government policies on
medical expenditure.
Large customer The largest customer provides 7% and 9%  Anticipate and adapt to needs of
dependence of divisional sales for Business Analytics key customers.
Division and Medical Division respectively,  Contingency plan for
which is significant. redeployment of resources if key
customers leave.
Cyber security Our data and systems, and those of our  Data privacy and security
strategic partners and customers, are programmes with the aim of
susceptible to cyber-attacks where ensuring that data is protected
external parties seek unauthorised access. and that we comply with relevant

Our cyber security measures, and the legislative, regulatory and

measures used by our third-party service contractual requirements.
providers, may not detect or prevent all  Continue to invest in rigorous
attempts to compromise our systems, administrative, technical, and
which may jeopardise the security of the physical controls.
data we maintain or may disrupt our  Monitor third party and customer
systems. systems and data, particularly
This may cause misappropriation of data, where they interact with our own
deletion or modification of stored systems.
information or other interruption to
business operations.
This may lead to financial loss, reputation
loss and regulatory breaches.
Technology failure The operations are dependent on  Procedures for the protection of
electronic platforms and networks for our technology assets.
delivery of products and services. These  Business continuity plans,
could be adversely affected if we including IT disaster recovery
experience a significant failure, interruption plans and back-up systems, to
or security breach. reduce business disruption in the
event of a major technology
failure.
(2) DataSolutions Ltd
Valuation
At the acquisition date, the major asset of DS was the rights over Max software.
Share capital was only £1,000,000 and with negative retained earnings of £640,000 then recognised net assets
were £360,000.
Unrecognised intangibles, specifically Max Software (Max), had a fair value of £5m so (in the absence of any further
unrecognised intangibles):
£000
Consideration 8,000
Less
Net assets at acquisition (360)
Identifiable intangibles (5,000)
Goodwill 2,640
On 1 July 2015, the date of the acquisition, whilst the value of Max made up most of the value of the business of
£8m there were clearly other factors. These may have been intellectual property rights over other programmes; the
expectation of future earnings despite losses to date; the expectation that DS would contribute to the other activities
of ABS to make it worth paying £8m to secure the DS business and its employees.
By 30 June 2018, it would appear that the acquisition has not been a success for ABS. The key asset of Max is
becoming outdated and its sale value of £480,000 is far below its carrying amount of £2m (£5m – (3 years x £1m
amortisation)) at that date.
Whilst £480,000 could be seen as a floor price for the sale of DS shares, there may be other costs in relation to
employees being transferred to the buyer, retained or made redundant. However, the sale of the shares may
transfer some of these obligations (subject to legal constraints such as TUPE). Also as the Max Software is
becoming outdated, its value may decline from £480,000 by the date of sale.

The fact that DS is making losses and that Max software is no longer being utilised by the remainder of the ABS
business means that any goodwill that existed on acquisition in excess of the Max value is unlikely to still be
significant.
Any other assets held within the DS SoFP would need to be valued and considered as additional value.
Conversely, however, any liabilities or other obligations of DS may mean that the value of DS shares may be lower
than the value of the Max programme as liabilities would probably transfer with the share sale.
Liabilities and obligations may include contractual conditions relating to the acquisition (eg to the previous owners
and to employees). Legal due diligence would be needed to explore the nature of any obligations and how these
would differ between an asset sale and a share sale.
Overall, subject to there being significant liabilities or new programmes or processes under development, the Max
Software value plus any other net assets, is likely to be close to the DS share value.
Financial reporting
Sale of Max Software asset
Individual financial statements of DS
Max is an internally developed intangible asset and so would not be recognised in the individual financial
statements of DS. Any proceeds on sale would therefore be recognised in full in profit or loss.
ABS group financial statements
On acquisition, Max Software would need to be recognised in the group accounts as a technology based intangible
asset (a specific example in IFRS 3). It should be measured at its fair value on the acquisition date, assuming this
can be ascertained reliably.
IAS 38 permits two methods of measuring intangible assets: the cost model (cost less amortisation) and the
revaluation model. The revaluation seems inappropriate as there is no active market given the uniqueness of the
software.
If the Max Software intangible has not been previously impaired it needs to be impaired at 30 June 2018, which
would be prior to any sale.
The intangible asset of Max Software currently has a fair value of £480,000. If this is also the recoverable amount, it
is below its carrying amount of £2m (£5m – (3 years x £1m amortisation)) at 30 June 2018. An impairment of
£1.52m would therefore take place. Given the software asset is impaired, the goodwill would also now need to be
impaired.
If Max Software is eventually sold, any excess net disposal proceeds above £480,000 would be deemed as a profit
on disposal. To the extent that the net disposal proceeds are below £480,000 this would be deemed as a loss on
disposal.
Whilst the board has decided to sell DS, the method of sale is still undecided, and it is not being advertised, so it
does not meet the IFRS 5 held for sale criteria.
Upon disposal Max Software would be derecognised.
Sale of DS shares
ABS parent company financial statements
The shares of DS would initially be recognised as a financial asset (ie an investment) at their original cost of £8m in
the ABS parent company financial statements.

Where there is an indication of impairment (eg through the potential obsolescence of Max Software) then the
financial asset should be impaired to its recoverable amount.
For example, if at 30 June 2018, the share value is approximately the same as the Max value of £480,000, then the
impairment would be £7.52m (£8m - £480,000) assuming there had been no previous impairment.
When the DS shares are sold, any excess net disposal proceeds above £480,000 would be deemed as a profit on
disposal. To the extent that the net disposal proceeds are below £480,000 this would be deemed as a loss on
disposal.
Upon disposal, DS shares would be derecognised in the ABS parent company financial statements.
ABS group financial statements
The impairment of the DS business will be reflected in the impairment of the goodwill on acquisition of £2.64 million.
Based on the above discussion of the value of Max Software, goodwill looks to be fully impaired in addition to the
impairment of the intangible asset Max as noted above.
The profit or loss on disposal of the DS subsidiary in the group financial statements will be the difference between
the sale proceeds and the parent’s total investment in the subsidiary (ie the net assets of DS as they would appear
in the group SoFP immediately prior to disposal).
As the original goodwill of £2.64 million is fully impaired at 30 June 2018, then this does not need to be considered.
As a subsidiary, DS is likely to be a reportable segment and therefore meet the definition of a discontinued activity
in accordance with IFRS 5. Appropriate disclosures will therefore be required.
(3) Internal audit - Cyber security
The cyber incident on 28 June 2018 has illustrated ABS’s vulnerability to cyber-attacks from external sources with
third party service providers.
As a first step in respect of that data incident, the board needs to establish:
 There has been full data cleansing and systems cleansing such that there is no continued contamination
from the breach.
 That a similar incident could not occur such that files from third party service providers are in future tested
for malware with a more robust firewall, the same as from non-trusted external communications.
 Review the security systems of third party providers on a regular basis as part of any agreement.
Whilst the specific causes of the attack and its consequences can be addressed by the above measures the
incident highlights the risk from other types of cyber-attack and from other sources including customer and other
third-party service providers.
Integrity of customer data held by ABS is fundamental to the company’s business model. This emphasises that the
report by the internal audit department is too limited in focusing only on technical risks rather than also seeing it as
a wider business risk where responsibility is throughout the organisation, not just in the sphere of the IT department.
The supply chain is just one set of external partners from which cyber risk could arise. Other external sources of
cyber risks include: customers; business partners; IT service providers; and subcontractors. All these external
relationships should be part of a wider assurance engagement, but third-party service providers are the immediate
focus of this report.
It may be unproductive and unrealistic to gain assurance over all third-party service providers and therefore a
degree of prioritisation is required in any cyber security risk management strategy. It is important to target efforts on
the greatest risk providers, which may not be the same as the highest value providers. However, ABS should at
least require third parties to confirm their security measures and procedures in terms and conditions of dealing with
the company.

Those suppliers with IT systems which are integrated with ABS represent one of the greatest risks. Small
companies which do not have a significant IT security budget may also be a significant risk. Similarly, customers
may not have well developed IT security systems as this may not be core to their business.
It is also important to make cyber assurance part of an ongoing process, not a one-off exercise. This is likely to
require regularly reviewing processes and procedures over the entire life cycle of a third-party service provider’s
contract.
In the June cyber incident, the attack accessed the Medical data analytics system. This is a key risk as it can
potentially have life threatening consequences for individuals. The Medical Division should therefore be a key focus
in assurance over cyber risks from third-party service providers.
However, to the extent the common platforms, programmes and processes are used, the assurance engagement
should review for cross contamination into the Business Analytics Division’s systems.
Recommendations for action
For selected third-party service providers which have been identified as a significant cyber risk, it is important to
consider the nature of any critical business relationships alongside IT security. This may require building a culture of
a common approach to risk and a common risk vocabulary, rather than imposing conditions. This may involve
sharing data security across the supply chain, including tier 2 and tier 3 suppliers (ie suppliers of suppliers). ISO
27000 series could provide a benchmark for required standards and for due diligence.
If co-operation is not forthcoming, the business consequences of losing a third-party service provider may need to
be weighed against cyber risks.
Service level agreements with third-party service providers may need to include transparency and access
conditions to their files and systems in order to obtain assurance as a condition of doing business. This will facilitate
ongoing IT due diligence procedures throughout the life cycle of the supply contract. Service level agreements may
also include penalty clauses for cyber breaches in order to provide incentives for suppliers to comply with conditions
and install IT security systems.
(4) Claud’s hedging transaction
(a) Financial reporting
The €1m receivable is a monetary item and is to be retranslated at the closing bid £/€ spot rate of 1.1875. ie
receivables will be recognised at £842,105 (€1m/1.1875).
At 1 May 2018 the receivable was stated at £831,601 (€1m/1.2025).
A foreign exchange gain of £10,504 (£842,105 - £831,601).
The € loan is stated at amortised cost including accrued interest translated at the closing bid £/€ spot rate of 1.1875.
ie
(€1m x (1 + (0.035 x 2/12))/1.1875 = £847,018
The sterling deposit is stated as a financial asset with accrued interest. ie
€1m/1.2025 x (1 + (0.03 x 2/12)) = £835,759
(b) Nature and consequences
ABS is exposed to exchange rate risk on the receipt of €1 million. The risk relates to the euro weakening against the
£ (ie the £ strengthening) as the €1 million receipt would then be worth less when converted to £s at the end of
October 2018.

The treasurer has undertaken a money market hedge by borrowing € so the amount payable after 6 months should
be €1million.
As a consequence, ABS has a net €1 million, 6-month liability with a 3.5% interest rate. Therefore, it needs to pay
€1 million x (1+ 0.035/2) = €1,017,500 on 31 October 2018. It seems to be Claude’s intention that this is to be
repaid (largely) from the euro receipt of €1m. However, there is a (small) currency risk on the €17,500 element of
the loan which cannot be repaid from the €1m receipt.
Therefore, whilst the general principle is correct, Claude has not borrowed the appropriate amount (ie too much) for
a money market hedge for precise offsetting with this transaction. It should be noted however that this amount is
small and that there are regular euro receipts such that there is no major exposure from Claude’s over-borrowing.
(c) Alternative hedging arrangement
The correct procedure and amounts for a money market hedge would have been as follows:
€1 million will be received six months after the transaction.

As a result €982,801 (€1m/(1 + (0.035  6/12))) should have been borrowed on 1 May 2018 and converted
into sterling, with the euro loan to be repaid from the receipts.
The net sterling amount 6 months hence is:
{[€1m/(1+(0.035 x 6/12)] / 1.2025 x [1 + (0.03 x 6/12)]}
= £817,298 x 1.015
= £829,557
The equation for the €1million receipt in 6 months is to calculate the amount of euro to borrow now (divide by
the euro borrowing rate) and then to find out how much that will give now in sterling (divide by the exchange
rate). The final amount of sterling after 6 months is given by multiplying by the sterling lending rate.
The statement by Claude that a profit has been made on the transaction is not true as the € has strengthened
against the £ by 30 June and therefore, in the absence of hedging, the €1m receipt would have been worth more in
£ sterling terms in the absence of hedging.
(5) Ethics
Ethics pertains to whether a particular behaviour is deemed acceptable in the context under consideration. In short,
it is ‘doing the right thing’.
In making any ethical evaluation it is first necessary to establish the facts. In this case, it would seem that the facts
are reasonably clear in that Helen appears to have admitted to Daniel what she has done.
What is less clear is whether Helen’s assurances are valid in asserting that her private use is not in conflict with
ABS’s business interests. This needs to be evidenced and established. It is difficult to see how this can happen
without the wider involvement of the board.
It also needs to be established that no ABS data, or that of its customers, was accessed, used or transferred. Again,
it is difficult to see how this can happen without the wider involvement of the board.
In respect of both the above issues, a degree of professional scepticism needs to be applied to Helen’s assurances
as there is a potential conflict of interest.
Legality issues are important in that use of company assets for personal reasons is potentially fraudulent. However,
as the original writer of the programme, it needs to be established that Helen does not have any continuing right to
its use under the acquisition agreement. Legal advice needs to be taken.

If it is fraudulent then Daniel has a duty to disclose these facts to the board. If Daniel does not do so, then I have a
legal duty to make disclosure to the board or to SOCA.
There is another issue of legality in that Daniel, is not acting in the best interests of the company. This could be a
breach of his fiduciary duty as a director. Legal advice should be taken.
It is helpful to apply the Institute of Business Ethics three tests:

 Transparency
 Effect
 Fairness
Transparency - would Daniel and Helen mind people (board members, existing customers, suppliers, employees)
knowing that one of ABS’s data analytics programmes had been used for private purposes by Helen.
It is clear that if the action is illegal and Helen loses her job then she would not want transparency. It would also
appear that in an effort to protect Helen, Daniel also would not want transparency. His motivation may be for the
benefit of the company in benefiting from Helen’s services, but the board could also make a similar judgement, and
would have the authority to do so. There may be personal motivation for Daniel wanting to keep Helen which could
be damaged by transparency.
In attempting to keep the matter confidential to Daniel alone, the ethical tests of openness and transparency do not
therefore appear to have been met.
Effect – whom does the use of ABS’s data analytics programme for private purposes affect or hurt? Also, whom
does non-disclosure harm or hurt?
If Helen’s assertions are correct that her private use is not in conflict with ABS’s business interests then any harm
may be limited, particularly as she has agreed not to access the programme in future.
Similarly, if Helen’s assertions are correct that no ABS data, or that of its customers, was accessed, used or
transferred then any harm may be limited, although such actions may cause concern amongst customers if it
became apparent there was potential access.
Fairness – would the use of an ABS data analytics programme for private purposes be considered fair by those
affected?
Much would depend what the access was used for. If an unfair advantage was gained due to the access then this
may be considered unfair by Helen’s rivals. Similarly, if Helen took advantage of the access, whereas other
employees did not, or could not, this may be seen as an unfair benefit by other employees.
Actions in response to ethical issues
Daniel’s initial actions should be:
 Report the matter to the full board who are authorised to make a decision about Helen’s behaviour.
 Following full disclosure, ensure, as far as possible, that the facts are established: (a) that Helen’s private use is
not in conflict with ABS’s business interests; and (b) no ABS data, or that of its customers, was accessed, used
or transferred.
 Suggest that the company takes legal advice, as to whether Helen’s actions would be illegal, either being
criminal or in breach of contract.

Question 2 – Rein plc
Scenario
Rein Ltd operates in the UK food processing and packaging industry, producing fish and meat products and has not
performed well recently.
One main cause of the poor performance is that business operations are causing delays and inefficiencies that do
not add value for customers. A project team has been instructed to capture operating data on key processes and
some information is provided.
Rein also needs to review its future financing as a matter of urgency. Some existing loans are due for repayment
over the next few years and, if it cannot refinance these loans, the company’s solvency will be in doubt. The finance
director has provided some financial information to assess Rein’s future financing needs and its liquidity and
solvency risks. She has also prepared information on a factoring proposal for raising new finance.
Mark Grid
Requirements Technical & Skills assessed

Skills
(1) Evaluate the Giant contract and 10  Analyse and assimilate the data provided in a
advise whether it should be structured manner (eg a table)
renewed, on similar terms, when the  Carry out data analysis to identify whether the
current contract expires on 31 contract should be renewed
December 2018.  Analyse key pricing and return differences
between customers and appraise the issues
arising
 Evaluate longer term effects, beyond minimum
contract period
 Use judgement to identify and select capacity
as a key issue
 Identify and explain relevant risks
 Provide reasoned recommendations
(2) Identify and explain the potential 13  Understand, assimilate and structure the data
delays and inefficiencies in the in an appropriate manner
operating activities of the meat and  For each element of the operating cycle
the fish divisions and suggest identify and explain the factors causing delays
appropriate improvements. Use the and inefficiencies; making comparisons
operating data (Exhibit 3) and other between the two products
information provided.  For each element of the operating cycle use
judgement to determine effective
improvements to enhance efficiency and
reduce delays
 Assimilate the data at each stage of the
operating cycle to provide an overall
assessment and evaluation
 Use judgement to provide a reasoned
recommendation on the most appropriate
improvements which draw on the preceding
analysis.

(3) Evaluate and explain the financing 12  Analyse and assimilate the data provided in a
risks and solvency of Rein. Include structured manner (eg a table)
forecast free cash flows after taking  Carry out structured and logical analysis of
account of the recovery plan. Ignore adjusted forecast free cash flows to identify the
the factoring proposal. amounts generated over a four-year horizon
 Set out and explain assumptions and other
relevant factors to be considered
 Use judgement and analysis of the data to
evaluate the feasibility of refinancing the loans
 Provide a reasoned recommendation
(4) With regard to the factoring proposal 10  Explain the key financial reporting issues of the
(Exhibit 5): factoring arrangement
 Set out the appropriate treatment of the
(a) Set out and explain the factoring arrangement
financial reporting treatment;  Evaluate the factors relating to the
and appropriateness of factoring in providing the
(b) Advise Rein whether it should necessary funds for refinancing
factor its receivables.  Provide a reasoned recommendation taking
account of all relevant factors
Maximum marks 45
Examiner’s comments
Requirement 1 – Giant contract
Many weaker candidates made little or no use of the data. For those that did use the data, operating margin was
the most common calculation with candidates recognising that the Giant contract generated a lower margin than
the other contracts. Disappointingly, there was limited consideration of the opportunity cost of retaining the contract
or the fact that in retaining, economies of scale could be capitalised upon. Often conclusions just discussed
retention of the contract because of familiarity and consistency, instead of using a more considered analysis.
Better candidates provided a balanced appraisal of the positive and negative impacts for Rein with supporting
argument and numbers where appropriate.
Requirement 2 – Operating activities
This requirement tended to provide one of two structures to candidates’ answers.
Better candidates structured their answers by addressing systematically each of the seven components of the
operating cycle, identifying weaknesses and suggesting improvements in each case. In so doing, comparisons were
drawn for each activity between meat and fish products.
In contrast, the approach of weaker candidates was (in a variety of ways) to structure their answers by merging the
components of the operating cycle, then summarising key issues for these groups of components. Some weaker
candidates prepared a whole section on meat, and then another a whole section on fish – thereby losing the cross-
sectional comparisons between the two products, as well as merging the different issues for each of the seven
components of the operating cycle.
In terms of content, the better scoring answers identified tangible measures to improve each process; discussing
for example, new transportation methods, improved scheduling and co-ordination of production runs so that
downtime could be minimised. In contrast, weaker candidates had few, if any, recommendations for improvements
and often just identified the problems.

Requirement 3 – Financing and solvency
For many candidates this was the weakest requirement on the paper.
Most candidates (but far from all) made an attempt at calculating the forecast free cash flows. However, although
the numbers were fairly straightforward, acting as pegs on which to hang the discussion, only a minority correctly
calculated the cash balances at the end of each year.
Many concluded that the financial state of the company in 2021 and beyond was fragile, but some answers lacked
range and depth of discussion.
Only better candidates identified that there would only be solvency issues in the next year or two if the bank
decided to call in the overdraft earlier than agreed.
Better candidates saw the repayment of the loans as the key issue, identifying that there should be sufficient cash
to repay the loan in 2020. Then noting that from 2021, there were not sufficient funds to repay the loan.
For many candidates, instead of logically discussing alternative methods of finance or negotiations given the cash
shortfall, their discussion went immediately to questioning whether the business was a going concern. Whilst this
was valid, candidates jumped to this conclusion, as opposed to working through the prior steps and considering
alternative actions to obtain finance and highlighting their merits and problems.
Requirement 4 – Factoring proposal
There was a mixed response to this requirement.
Many provided too brief a narrative on the FR treatment, for example restricting their discussion only to
derecognition.
Most candidates were able to use some numbers in their solution, by applying the insurance premium and the
interest to get an overall impact. There was some confusion about the £7m and the £6.3m both in terms of
derecognition and the underlying cash flows and risks to each party.
The reasoned advice was frequently weak by recommending the factoring on poor grounds. In particular, many
treated the factoring arrangement in isolation from the rest of the scenario and therefore produced a textbook
answer. It was necessary to consider the particular financing problem the that the factoring arrangement was trying
to solve and therefore whether factoring would be a suitable solution for Rein.
Better candidates recognised that factoring did not generate incremental cash and that there would still be an
inability in the longer term for Rein to meet the debts as they fall due. They also recognised it is very short-term
and expensive finance at a time it is not desperately needed (as evidenced by the cash flow analysis in the
previous requirement).
Better candidates were able to work out an annual interest cost of the factoring arrangement. Some weaker
candidates confused the monthly rate with an annual rate.

Draft response to terms of reference
1. Giant contract evaluation and renewal
Meat to
non-Giant
customers Giant Total Meat Fish Total
Meat processed (Kg) 3,600,000 300,000 3,900,000 400,000 4,300,000
Revenue £ 36,000,000 2,400,000 38,400,000 6,000,000 44,400,000
Operating profit £ 1,080,000 48,000 1,128,000 300,000 1,428,000
Operating profit margin 3% 2% 5%
Price £ 10 8 15
Sales volumes and opportunity cost
The giant contract makes up 7.7% of sales volume for meat and 7% total sales volume. Given the company is at full
capacity for packaging and near full capacity for food processing then the Giant contract consumes a significant
element of productive capacity which could be used in accepting alternative, and possibly more profitable,
contracts. In this sense, it has a potential opportunity cost.
The opportunity cost may be limited by the fact that only small customers have, to date, been rejected due to lack of
capacity. In addition, whatever the retrospective opportunity cost has been, going forward greater operating
efficiency, engendered by the recovery plan, may reduce the future opportunity cost.
Sales price
The data shows that the average price of £8 per kg for the Giant contract is lower than the average for other meat
products which is £10 per kg.
This may be due to larger discounts to Giant than other customers. These might have been offered due to the fact it
is a large contract with economies and scale and scope, however the low margins (see below) do not support this
notion.
Alternatively, the tender may have been underpriced to ensure it was successful.
A further, or alternative, explanation is that the type of meats sold to Giant are dissimilar to those sold to other
customers, being cheaper types of meat or lower quality for Giant.
Costs
Limited information is provided on costs, but there may be some benefits of large production runs. As noted above,
this may result in economies of scale. Alternatively, as production nears capacity, there may be diseconomies of
scale resulting from production scheduling difficulties and overcapacity problems at some times of the day or week.
Margins
The operating profit margin, at 2%, is lower than the other meat contracts at 3% or the fish products at 5%. Whilst
appearing to make an incremental profit, the Giant contract does not appear as profitable as other contracts and
therefore on average if there is a capacity constraint then greater questions over renewals would be raised rather
than for other contracts.
A note of caution is that the allocation of packaging costs appears arbitrary and may have distorted operating
margins which may not therefore provide reliable information for decision making.
Moreover, the costs include fixed costs (both those within the food processing division and those allocated from
packaging). As a result, the contribution margin on the Giant contract is likely to be more significant than the
operating profit margin.
Advice

The renewal of the Giant contract depends largely upon whether other contracts are available which may generate
a greater contribution and whether Rein continues to operate at, or near, full capacity. If this is the case, then there
may be a significant opportunity cost to renewal and, if only available on current terms, it may be optimal to reject it
in order to take advantage of offers from other potential customers.
If however the recovery plan can generate spare capacity then continuing with the Giant contract may generate a
reasonable positive contribution, with reduced opportunity cost.
Such a decision is not however without risks. Renewal on same terms does not mean the same profit will be earned
or the same costs incurred. For example, costs may have risen or be volatile as exchange rates may shift with
increasing costs, whilst the price with Giant is fixed.
Given there appears not to be a tender for the renewal, it may be possible to negotiate better terms with Giant as a
condition of renewal.

2. (a) Operations, supply chain and distribution activities
Comparing meat and fish – summary of operating differences

Meat Fish
Scale Large Small
Types 7 3
Suppliers Few Many
Order size Large Small
Suppliers Quarter overseas Half overseas
Packaging Trays only Many types
The operating data is limited but below is a summary of the apparent inefficiencies; risks and costs at each stage of
the operating cycle. Suggested improvements are included.
Operating cycle - Meat Fish
average times Days Days
Order to delivery 4.8 6.9 The higher number of smaller suppliers for fish products is likely to
mean there is greater delay in waiting to obtain full loads before
delivery. The delivery journey time may also be greater for fish
products as half are from overseas, compared with one quarter for
meat.
Despite being a shorter delay for meat products, 4.8 days is still
significant for foods that have a short perishable life.
The risk is that foods may perish during the delay or have a shorter
useful life after arrival with increased costs of wastage.
The delay also means that urgent customer orders may not be able
to be satisfied. The fact that some agreed delivery times have been
missed makes this more uncertain.
Improvements
Contractual agreements with suppliers for more prompt and more
reliable deliveries. Consider JIT. Consider using more local
suppliers.
Information systems linked with suppliers’ information systems
where volumes justify this.
Food held in 4.2 1.8 Meat products are held in storage for much longer than fish
storage products. This may be due to poor production scheduling on the
meat production line which is not co-ordinated with deliveries. It
may also be that there are more types of meat, so meat products
are held in storage until the appropriate production run has been
set up for each type of meat.
Improvements
Co-ordinate the production runs for each type of meat product with
deliveries of that product.
Processing time 0.4 0.3

Short time but as machines are cleaned between production runs
there is some idle time.
Improvements
Investigate new cleaning methods to reduce machine down time.
Transfer to 0.2 0.2 Normally an efficient transfer system.

packaging plant Improvements
No action.

Packaging time 0.2 0.5 Machinery needs to be reset for each type of packaging therefore
fish make take longer in packaging due to change-overs.
Improvements
Consider reasons why fish take longer in packaging than meat.
Possibly benchmark against meat.
Held in inventories 8.0 3.0 Meat times are high. Products are held in inventory are at risk of
perishing, particularly if inventory holding times are excessive.
Improvements
Consider scheduling production to the timing of predictable
customer orders.
Delivery to 1.1 2.2 Goods are delivered to each geographical area when a truck can
customer be filled.
Fish times may be longer due to small batch sizes.
The risk is that food may perish during delivery. Also, customer
dissatisfaction arises with delays in delivery.
Improvements
Suitable storage during transportation in controlled temperatures.
Information systems linked with customer information systems.
Total (days) 18.9 14.9
Overall assessment
Overall there are significant delays for meat and fish of 18.9 days and 14.9 days respectively. In addition to the
specific inefficiencies, costs and risks identified at each stage of the operating cycle there are more general risks
and costs. The delays in storing and holding food give rise to costs (storage, chilling, rental space, labour, lost
interest on cash flows, spoilage). These costs are not adding attributes to the product or service valued by
customers and therefore, to the extent they can be reduced or eliminated, costs can be reduced without harming
the quality of the product. Lower costs can therefore give rise to higher profits as revenues would be unaffected.
Indeed, getting the products to customers more quickly with lower wastage and longer shelf lives may enable Rein
to be seen as a higher quality supplier enabling higher prices to be charged.
In addition, to the extent that the above processes are part of the capacity constraint which limits the output (eg if
storage space or processing capability is at capacity) more efficient processes may raise capacity and enable
increased sales volumes.
One method of approaching this problem in the recovery plan is through business process re-engineering (BPR).
BPR involves focusing attention inwards to consider how business processes can be redesigned or re-engineered
to improve efficiency. Properly implemented, BPR may help an organisation to reduce costs, improve customer
service, cut down on the complexity of the business and improve internal communication.
(3) Evaluate financing risks and solvency
Forecast free cash flows: years ending 30 June
2019 2020 2021 2022

Forecast Forecast Forecast Forecast
£000 £000 £000 £000
Free cash flows less interest 1,100 1,100 1,100 1,100
(without recovery plan)
Recovery plan cost savings 200 400 500 500
Free cash flows less interest
(with recovery plan) 1,300 1,500 1,600 1,600
B/f balance (overdraft) (600) 700 200 (2,200)
Loan repayment (2,000) (4,000) (9,000)
C/f balance 700 200 (2,200) (9,600)

Rein is forecast to generate positive free cash flows (after interest) in each of the next four years.
Year ending 30 June 2019
In 2019, assuming the forecasts are valid, then the free cash flows of £1.3m will be sufficient to repay the overdraft
of £600,000 at the end of the financial year. There is a reasonable margin of safety in this case as the free cash
flows without the recovery plan of £1.1m would also be sufficient to repay the overdraft.
There is a solvency risk if the bank calls in the overdraft during the year before the free cash flows are generated.
However, assuming the free cash flows occur evenly over the year there should be sufficient cash to repay the
overdraft a little before 31 December 2018 (ie [600/1,300] x 12 months, after 30 June 2018).
In 2020, the first of the three loans becomes repayable. This amounts to £2m. If the forecast is valid, then the
surplus cash from 2019 (£700,000), together with the free cash flow for 2020 (£1.5m), will be sufficient to repay the
loan due on 30 June 2020 of £2m. The margin of safety is 10% so there is some risk if the forecast enhanced cash
flows from the recovery plan are not delivered. If this is the case, then a contingency may be to ensure there is a
continued overdraft facility from the bank.
Assuming that the first loan is repaid in the year ending 30 June 2020, then the forecast excess cash at 30 June
2020 is £200,000. With the forecast free cash flow for 2021 (£1.6m), this amounts to a forecast cash balance of
£1.8m at 30 June 2021 which will not be sufficient to repay the second loan of £4m which is due on that date. The
shortfall of £2.2m is substantial and is likely to be greater than can be realistically financed by an overdraft.
There is therefore a need to plan early to approach the bank with the forecasts to explore whether there is a
willingness to refinance the loan with a new loan and, if so, whether it would be on reasonable terms.
Whilst there is a possibility of approaching another bank this would be difficult as it would only have a second
charge over the assets as the relationship bank has the first charge. Sale and leaseback of assets would also be
difficult as covenants from the relationship bank would be very likely to restrict this as it holds a charge over these
assets.
Even if the bank refinances the second loan in 2021, there is a much more substantial loan falling due in 2022 of
£9m. This clearly cannot be financed from free cash flows and the shortfall is significant.
In order to roll over the two loans, then the total debt would be £13m (£4m + £9m) less the cumulative cash flow,
which amounts to £9.6m.
In terms of eligibility for a new loan, PPE has a carrying amount of £16.4m and it may be that the fair value is
greater than its carrying amount.
However, the debt capacity is limited and there is a real financial risk of not being able to refinance all the loans.
Summary
If the existing loans repayable in 2021 and 2022 can be refinanced by the relationship bank, then Rein is generating
sufficient cash flows to service those loans. If however they cannot be refinanced then solvency becomes an issue.
It may be difficult to refinance the 2021 loan as the relationship bank will continue to hold charges over assets in
respect of its 2022 loan and covenants may not permit a second charge.
If refinancing is a problem, then raising finance through the factoring of receivables may be an alternative solution at
this stage but it has significant limitations (see below).

(4) Debt factoring arrangement
(a) Financial reporting treatment
The nature of debt factoring is addressed by IAS 39 Financial Instruments: Recognition and Measurement, although
the standard does not give specific detailed guidance on the treatment of debt factoring. A key question is whether
factored receivables should be derecognised as a financial asset.
Derecognition (ie ceasing to recognise the factored debts) is appropriate only where the criteria for derecognition of
a financial asset according to IAS 39 have been satisfied.
Specifically, derecognition should only take place where the seller (Rein) has transferred substantially all the asset's
risks and rewards of the receivables. (Note that if a transfer occurs and the seller neither transfers nor retains
substantially all the risks and rewards the asset will only be derecognised if control has been lost.)
This is a question of judgement as to whether substantially all the risks and rewards have been transferred. In
respect of the £6.3 million (90% × £7m) that would be immediately received from the factor then it would appear
that there is a strong case that this should be derecognised given that it is non-recourse finance. However, interest
has to be paid until cash is received from receivables, which gives some slow-moving risk and it is a question of
judgement as to whether this is 'substantial' in the context of the specific circumstances.
Rein is ultimately to receive a net total of at least £6,633,200 (see working below) thus the question arises as to
when risk passes with respect to the remaining £333,200 (£6,633,200 -£6,300,000) and thus when derecognition
should occur with respect to this amount. This is again likely to be a question of judgement as to what is a
'substantial' risk, but it would not exceed three months before derecognition when the factor assumes unconditional
responsibility.
The £3.2m of receivables which have not been factored will continue to be recognised.
The £6.3m received would be shown under 'cash and cash equivalents' in the statement of
financial position.
Workings - Receivables factored without recourse:
£
Gross receivables sold to debt factor = 7,000,000
Less credit protection fee (2% × £7m) = (140,000)

Interest (£6.3m × 1.2% × 3 months) (Note) = (226,800)
6,633,200
Note: This assumes the worst case that none of the receivables pay within three months.
Best case is that £6.3m is repayable after two months in which case interest payable would be
£151,200 (ie £6.3m × 1.2% × 2 months)
(b) Debt factoring advice
This method of finance seems inappropriate as it is not incremental finance as the cash would have been received
anyway from customers within a few months and better management of receivables could have achieved the same
end. It is also very expensive over a three-month period if only £6,633,200 of £7m is received. This is over 5.24% in
three months which annualises to 22.7%. Unless there is a strong suspicion of high bad debts (which is unlikely for
large supermarkets) this seems inappropriate in terms of costs and timing.
There may be some savings in reduced administration. but these seem unlikely to be large given that Rein needs to
maintain its sales ledger function for receivables which have not been
factored. There may also be an adverse reputational damage.

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Strategic Business Management – Advanced level – July 2018

This report includes:

Question 1 – Analytics Business Services Ltd (ABS)

Requirements Technical & Skills assessed

@ICAEW 2018 Page 1 of 22

(2) In respect of DS: 16  Assimilate data at time of acquisition, and

@ICAEW 2018 Page 2 of 22

Requirement 1 – Key risks

Other weaknesses displayed by a significant number of candidates were:

2(b) Financial reporting for DS disposal

This was a poorly answered requirement by most candidates.

@ICAEW 2018 Page 3 of 22

Other weaknesses displayed by a significant number of candidates were:

Requirement 3 – Cyber security incident

Requirement 4 – Foreign currency hedge

@ICAEW 2018 Page 4 of 22

@ICAEW 2018 Page 5 of 22

Business Analytics Medical

% revenue from division 68% 63% 32% 37%

Future risks from the data

Risk Nature and evaluation of risk Risk mitigation

@ICAEW 2018 Page 6 of 22

In 2018 Business Analytics’ operating

Brexit and other Changes in international trading  Monitor developments in

@ICAEW 2018 Page 7 of 22

Our cyber security measures, and the legislative, regulatory and

(2) DataSolutions Ltd

@ICAEW 2018 Page 8 of 22

Sale of Max Software asset

Individual financial statements of DS

ABS group financial statements

Upon disposal Max Software would be derecognised.

ABS parent company financial statements

@ICAEW 2018 Page 9 of 22

ABS group financial statements

(3) Internal audit - Cyber security

@ICAEW 2018 Page 10 of 22

Recommendations for action

(4) Claud’s hedging transaction

(a) Financial reporting

At 1 May 2018 the receivable was stated at £831,601 (€1m/1.2025).

A foreign exchange gain of £10,504 (£842,105 - £831,601).

(€1m x (1 + (0.035 x 2/12))/1.1875 = £847,018

The sterling deposit is stated as a financial asset with accrued interest. ie

€1m/1.2025 x (1 + (0.03 x 2/12)) = £835,759

(b) Nature and consequences

@ICAEW 2018 Page 11 of 22

(c) Alternative hedging arrangement

€1 million will be received six months after the transaction.

The net sterling amount 6 months hence is:

{[€1m/(1+(0.035 x 6/12)] / 1.2025 x [1 + (0.03 x 6/12)]}

@ICAEW 2018 Page 12 of 22

It is helpful to apply the Institute of Business Ethics three tests:

Actions in response to ethical issues

Daniel’s initial actions should be:

@ICAEW 2018 Page 13 of 22

Question 2 – Rein plc

Requirements Technical & Skills assessed

@ICAEW 2018 Page 14 of 22

Requirement 1 – Giant contract