INTRODUCTION TO ICAN/ICAEW CASE STUDY

Overview
ICAN Case Study has taken a little bit of new dimension. The major introduction was the concept
of Advance Information (AI) popularly called preseen. This approach already existed with
ICAEW system.

The AI which forms part of the case study paper will be sent to candidates exactly two weeks to
the examination date. Candidates are not expected to carry the AI or any work done into the
examination hall but rather carry out some research on the AI.

The unseen part of the case study exam will be presented with the preseen to candidates in the
examination hall.

In the new system, it is now compulsory for candidates to produce Executive Summary. This
constitute 20% of the total marks. Without Executive Summary, it will be pretty difficult to record
success in the Case Study Examinations.

Similarly, ethical issues must be presented in the case study report even if it doesn't form part of
the requirements in the case. This constitute approximately 10% of the total marks.

But I must emphasize that we still require to start preparations for ICAN Case Study paper ahead
of time.

Why Business Case Study?

Chartered Accountants 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 skills to interpret financial and other business data and communicate the underlying issues to
your clients. This role may be encapsulated in the phrase 'making the numbers talk'.

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 analyze financial and non-financial data, exercise professional and ethical judgment, 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.

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 variety of business
and professional advisors and stakeholders and meetings that they may attend.

The Case Study scenario may be based on any one of a variety of different organizational
structures or operations. 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.
Some tips to Passing Case Study Exam

 Don't wait until two weeks to the exam before you start to prepare. Preparation starts from
now!
 Business Case Study is living with you especially if you are working.
 Case Study exam encompasses the whole of ICAN/ICAEW syllabus. The business case can
be drawn from anywhere.
 Your require CR (Ratio Analysis) and more of SFM (business valuations, mergers and
acquisitions, finance options, etc) for case study exam. If you have passed these courses, go
back and study them.
 Read correspondences at work place and start practicing report writing.
 You also need to be vast in other areas of business issues such as Risk Management, Ethical
issues, CSR, Business reporting, Environmental issues, Strategy, Operational challenges, IT,
Corporate Governance, etc.
 Try to abide with these tips. I will open your eye to salient issues as we move on.

Examiner's Comments
The Examiner has said that one of the major pitfalls of candidates is their inability to produce an
Executive Summary. Some students even lack the understanding of where to place the Executive
Summary in the report.

Another concern is poor financial analysis. Most candidates lack analytical skills.

Format of a Good Business Report

If you pick up a case study paper, the first thing you need to do is to determine is if you are to
write an internal report or external report.

Business Case Report Contents

● Cover Page (Page 1)

● Executive Summary (Page 2 - 3)
● Introduction: Here, you must link your report to the mail that was sent to you or your company.
Your introduction must also contain the requirements in the case. Then, apply professional
skepticism in the second or third paragraph. Also, consider wider context.
● Business Analysis (Use Business Model only where it is stated in the requirements)
● Financial Analysis
● Other specific requirement(s) in the case
● Ethical issues or Business trust
● Other matters such as risk management, corporate governance etc.
● Conclusions
● Recommendations
● Closing remark
● Appendix

How do we then know if its internal report or external report?

A. The first thing is to ask who are you writing the report about? Is it about the company you are
working with? If yes, in that case, its an internal report. If you are writing about another company
other than the company you are working with, it is an external.

B. Another determinant is who are you writing the report to? Is to the shareholders or the
Managing Director of the company you are working with? If yes, this is an internal report. But if
you are writing to the management of another company, it is an external report.

Now, let's start with external report format. If you are writing an external report, you must
design your answer script like a letter headed paper.

Format of External Reporting

Page 1 - Title or cover page

The very first page of your answer script must contain the following information:

■ Your company's details (Letter Head)

■ To:

■ Title of the report

■ Prepared by: (Name of your firm)

■ Date: Here, it must be the date in the case scenario

■ Disclaimer: This is only applicable to external business report writing.

Let me now illustrate this with an example....

Example - External Report Format

FCA & Co.(Chartered Accountants)

3, Opebi Road, Ikeja, Lagos
08036324090 [email protected]

To: The Board of Directors,

Allen Investment Plc

Report on Analysis of Financial Health of Mokola Holding Company Limited

Prepared by: FCA & Co. (Chartered Accountants)

September 12, 2019

This report is prepared for the Board of Directors of Allen Investment Plc and it is intended for
their use. We will accept no liabilities from third party who may place reliance on the contents of
this report without due authorization.

Format of External Reporting (Cover Page)

Example - Internal Report Format

To: The Managing Director,

Report on Analysis of Financial Performance for 2019.

Prepared by: Internal Audit Department

September 12, 2019

This report is for internal use only. (This is not compulsory)

Format of Internal Reporting (Cover Page)

Page 2 & 3 - Executive Summary

Your Executive Summary must not exceed two pages. We shall discuss this in details later.

Analysing Financials Using Ratio Analysis

Financial Analysis can be divided into Financial Statements Analysis and Financial Data
Analysis.

You can carry out Financial Statements Analysis by using all or any of the following:

● Ratios analysis;
● Trend analysis;
● Common Size Analysis; and
● Working Capital.

Financial Statements Analysis - Ratio Analysis

It is important that your comments in a ratio analysis are meaningful. Please be aware that in the
game of ratios, it's not about how long your analysis are, but how well it has been written.

DuPont analysis involves breaking down the net income or ROE of an entity into the relevant
elements that drives it.
The elements that drives net income according to DuPont are.
1. Tax burden
2. Interest burden
3. Operating profit margin
4. Asset turn over
5. Asset to equity ratio
Why is this important in analysing income statement?

If profitability drops from year to year, the areas I listed above drives it. Therefore, when you are
analysing profitability, these areas would help you to explain a declining profit.

So, if company A's profit reduced from 2015 to 2016, it's either it's operating margin reduced, or
its tax burden increased or its asset utilization dropped, or it's leverage increased.

Let me try to illustrate this...

The company's net income dropped drastically from 2015 to 2016 by over 20%. Looking at the
top line, gross profit margin remained unchanged standing at 40%. However, there's a sharp
decline in operating profit margin and also an increase in its interest expenses by 10% leading to
drop in profitability.

Going forward, it is necessary that the entity should adopt strategy to improve the management of
its admin cost...etc…

Tips to do a proper analysis?

In ratio anaylsis, it's not enough to just state the ratios or what happened to the ratio (increase or
decrease). You need to mention the drivers of the decline or increase and leave an action point for
the entity to act on.

So, answer these questions when analyzing the financials using ratios:
1. What happened to ROA? Did it increase? Yes.

2. Why? It could be because assets decreased, or profitability increased, or there's no debt to

repay?

3. Comment on the business impact.

4. Then, suggest how to improve this (if it's a decline) and how to sustain this (if it's an increase).

Comparison with industry data

In a case study exam, if you are given an industry average, please don't be too smart by
introducing new ratios. Just stick to the industry average ratios. You can however, go out of if you
need more information to support your findings.

For example, industry data may give you just ROA, while the question asked for return to
shareholders. In that case, you can introduce ROE.

In making comparison, please start from where you are to where the industry is. That is, consider
the company's performance in isolation then relate it to the industry.

For instance, when analysing liquidity, talk about what happened to the company's liquidity, year
on year, did it decrease, it increased! Then after that, compare your position to what is happening
in the industry.

Please before you start making comparison, look closely at the industry data and ensure you pull
out what is happening in the industry. The industry average may be declining all together or
increasing. This will help you better structure your analysis.

Analysing the Balance Sheet

Notes to the account is very important in analysing balance sheet items because most items in the
balance sheet do not relate to each other.

Sometimes, you may not be given the notes, in this case, apply professional scepticism.

Balance sheet analysis can be done using balance sheet ratios and trend analysis. Trend analysis is
very useful here.

Remember, too much story can be catastrophic. Limit all your answers to the requirements in the
case.

So, in the financial statements analysis, avoid the temptations to write too much. We all know too
much on ratio so the temptation is always strong. So how do you know you're writing too much?
If for any given ratio, you are writing over 7 lines, there's a chance that you are writing too much.

The Issue with Case Study

Most professional students sees Case Study as problematic but the point is that Case study is a
game that has rules but if you do not understand how the rules works, chances are that you will
just be guessing your way through the paper.

In today's class, we will explore the technicalities involved in this field and get you tuned into
how Case Study works.

Case Study - This is the system of applying technical knowledge on real world situations. The
situations are usually very complex with more than a single possible solution. It is your thinking
process and premises that lead through to your final answers that matters most.
Take note of some key terms that you must consider in when carying out business analysis;
✍Issues
✍Options
✍Professional Scepticism
✍Analysis
✍Evaluation
✍ Professional Judgement
✍Conclusion
✍Recommendations

Issues
When answering a requirement, viewing it from one angle will never be enough to provide a
concrete and fabulous conclusion that will satisfy the requirement.

In few occasions, viewing the requirement from one angle may be sufficient. However, this is
not usually the case. So, the steps to satisfy a requirement are usually broken down into bits.
Then each of the bits are tested to show whether they contribute positively or negatively to help
conclude on the bigger requirement.

These tests that are carried out on these little bits of angles are called issues. In other words,
issues are the perimeters or angles that we are testing to help us arrive at a position concerning
an overall requirement. if for instance you are told to assess a financial performance of a
company, looking at only the profit at the end of the year to conclude on the performance will be
very weak. You will need to look at the business from the profitability angle, liquidity angle, risk
angle, etc. Each of these angles can be further broken down into little bits. The liquidity angle
can be broken down to current ratio and acid test ratio. When you are looking at the current ratio
for example, the issue will be "Is there enough cash from operations of the business to meet
current liabilities and still have some left over to run the business?

We can easily see that requirements and issues are related. Requirements is the Grand Father
Issue, Liquidity is the Father Issue and Current Ratio is the 'son' issue. Your report will be full of
'son' issues'.

Options
Options are very much like issues. Options are matters for analysis.

When we want to ascertain or determine how we have performed in the past or how we will
perform in the future, we use 'issues'. But when we want to select among several choices, which
will serve us better, we use 'options'.

Both issues and options go through similar process. Let's say we want to raise money for our
business, we will break the choices available into equity and debt. Each of these can still be
broken further down. Equity can be broken down into ordinary shares and preference shares.
Preference shares can still be broken further down. The issue here is that which of these options
best fit for our business?

Professional Scepticism*
Let me go back to the issues. When you identify an issue, you are expected to also provide
possible solution to the issue. Lets say we are examining current ratio. The issue is 'is the
business liquid'? The simple answer will be 'yes' or 'no', but you cannot do that in case study
anaysis. Instead of saying yes, you will say the current ratio has grown from x:1 to y:1 and so on.

You must maintain an attitude of professional scepticism in your case study analysis. Here, you
look at the data being supplied in the case and make comment as to whether there are any
reason(s) to doubt it accuracy or integrity of the data. Is there possibly of withheld data? What
about the source of the data supplied?

You can also look at the financial statements whether it has been audited or otherwise. If revenue
is increasing, how sure are we whether its below or above budget?

Is industry average given? How do we ascertain if the company's performance was as a result of
operational efficiency or general industry trend?

Analysis
Analysis is the process of working with the data provided to help you produce information you
can input in your report.

Analysis involves the following:

✍Calculations
✍Collecting and gathering of data

They are not usually the main essence of the report.

A manager that asked you to advise them on the best project options may not be interested in
your NPVs, IRRs, CVP, Break-even, etc. He just want you to say "Project 1" is a better decision.

Analysis is not only calculations, it is also collecting and gathering of data. That is what we do
with PESTEL, SWOT, VALUE CHAIN, etc. We collect different data everywhere in the
exhibits and present it under a particular heading or a subheading.
Evaluation
Evaluation is to weigh the events around a particular issue and projecting into the effects it can
cause or create for future strategy.

Evaluation starts with identifying internal causes of a particular issue and then try to relate it
with external factors that caused it (if possible). Then, you project on how this will impact on
future plans (plans should be restricted to projections made by the management of your case
study).

Professional Judgement
Judgement is your hammer placed on management decisions or an advice on how to improve
performance.

It can also be your decision on what investment option should be pursued.

Issues that show big differences from your analysis should be given serious consideration in your
judgement. Issues that shows little differences or posed little impact on performance in the future
should be given lesser attention.

For example, if you calculated Liquidity ratio and the result was 50% difference and you then
calculated gearing ratio and the result was 2%, it will be expected of you to give more time to
liquidity ratio in your report.

Conclusion
The Business Case Study has requirements. Your introduction will always reflect the objectives
(which is the same thing as your requirement). Now, your conclusion should provide an answer
to the requirements.

All the other aspects of your report before this provides all the details and the dirty work, the
conclusion is the final summary of what you have been doing.
Conclusions should be writing in either general-particular style or particular-general style.

General to particular style starts with saying the general performance was bad, before then
descending to naming individual issues that were bad from which he concluded all was bad.

Particular to general starts with individual poor results and then generalised.

Conclusion works with your evaluation. You will bring up the issues and the causes. But you
must present them in a way that it answers the questions in the requirements.

Recommendations
Recommendations provide the practical things that can be done to improve performance or to
implement a particular option. You have to think beyond the strategic level; you have to think
along the operational and even the tactical level of management.

If there are regulatory implications, you have to state them. You should advise for more
investigation where required.

NOTE: Your introduction is always the same as terms of reference. It tells the objectives of the
report.

For example, 'This report contains the financial analysis of company xyz...."

Based on the question, you just compute the necessary ratios that can help you make a good
analysis. Then you try to identify the factors that made the ratio to be good or bad. This is very
useful when you are looking at more than a single year. You may have ROCE in year 1 as 20%
and yr 2 as 15%. What caused the decline in ROCE. What could be the effect of the decline?
What options are available to improve this position? Is ROCE of 20% the best they could have
done based on industrial index? What external factor could be responsible for this result?

The Concept of Capital Reduction

Introduction
Capital reduction is a way of reducing share capital. Tonite, we shall look at what it means, why
businesses might want to do it, and a guide to the processes and rules surrounding it.

What is capital reduction?

Capital reduction is a method by which a company reduces its shareholders' equity by cancelling
shares. After the share capital has been reduced, the number of shares in the company will
reduce by the amount of the reduction in capital.

Companies can reduce their share capital by:

 Cancelling capital that is not represented by the company’s assets.

 Repaying share capital that is no longer needed, and then cancelling the shares.
 Reducing the nominal value of shares in issue.
 Waiving or reducing any liability due on unpaid shares.

Reasons to reduce share capital

There are several reasons why a company might wish to reduce its share capital:
 To create distributable reserves. For example, in order to allow it to pay dividends to
shareholders.
 To return capital to shareholders where it is not needed for its day-to-day operations.
 As part of a group reorganization, for example where non-cash assets are transferred to
shareholders in a demerger.
 To reduce accumulated realized losses to pay dividends in the future.

When companies reduce their share capital, they will usually either make a transfer into a
distributable reserve or repay capital to shareholders in cash or other property.

Rules for reducing share capital

There are two ways in which a limited company can reduce share capital:

 by way of a court order; or

 by issuing a solvency statement.

A public company may only reduce its capital with court approval.

In both cases, the reduction is achieved by a special resolution of the eligible members of the
company. A private unlimited company can reduce its share capital without a court order or
solvency statement provided it is permitted by the Articles of the company.

What are the procedures for reduction of share capital?

Reducing share capital by issuing a solvency statement is a straightforward procedure, but this is
only available to private limited companies (limited by shares or by guarantee).

In order to achieve the reduction of capital, the directors must ensure that the Articles do not
prohibit capital reduction, and that there is at least one non-redeemable share in issue after the
procedure.

The solvency statement procedure is as follows:

 The directors resolve to propose a share capital reduction.

 The directors sign a statement declaring the company to be solvent.
 The directors must have reasonable grounds for believing the company to be solvent, so
must familiarize themselves with the latest financial statements and management accounts.
 A special resolution is passed to approve the capital reduction.
 The solvency statement, a compliance statement, the special resolution and a statement of
capital is filed at CAC within 15 days of the passing of the special resolution.
If the directors intend to wind up the company within a year, then they will confirm in the
solvency statement that the company will be able to pay its debts within twelve months of the
date that the winding up procedure commences, or in other cases, that the company will be able
to pay its debts as they fall due within the year following the date of the statement.

If the company is a PLC, then the reduction of capital procedure is similar, but the special
resolution to reduce the capital must be approved by the court. A private limited company can
also choose to have the reduction court-approved rather than following the solvency statement
procedure route.
What is capital reduction and reconstruction?
A reduction of capital may be used in the context of a scheme of arrangement whereby a
corporate group is reorganized. In this process, the target company’s shares are cancelled by way
of a reduction in capital, the resulting reserve is capitalized and paid up shares issued to a new
holding company in exchange for the issues of shares by that holding company to the target’s
shareholders.
Because the target company’s share capital is reduced to zero, the capital reduction will need to
be court approved, as the solvency statement procedure is not appropriate.
Capital reduction and Dividends
Companies are only permitted to pay dividends out of retained earnings.

A company may be trading profitably yet have accumulated losses that prevent payment of a
dividend. A reduction of capital can be used to reduce those losses or create a distributable
reserve sufficient to permit the payment of a dividend.
Case Study - Cadbury Nigeria Plc

Nigeria: NSE to Suspend Cadbury Shares Over Capital Reduction

6 JANUARY 2014 This Day (Lagos)

The Nigerian Stock Exchange (NSE) will place the shares of Cadbury Nigeria Plc on full
suspension as from Wednesday pending when the company will comply with the requirements
of its capital reduction exercise. Cadbury is reducing its capital base by about N12 billion under
a plan that was approved by the shareholders last year. The exercise will result in the
cancellation of two of every five ordinary shares held by investors.

In order to comply with the requirements of the Court Sanction approval the reduction, Cadbury
requested that the NSE place the shares on full suspension as from Wednesday, which is the
closure date for the exercise.

Consequently, the shares of Cadbury will not be traded at the stock market until all the
requirements have been complied with and the suspension lifted by the NSE.
Case Study - Dangote Cement Plc

Dangote Cement reveals share buyback plans

Dangote Cement Plc will hold an Extraordinary General Meeting (EGM) on January 22nd, 2020,
to deliberate on a long list of company issues, specifically plans by the company to buy back up
to 10% of its issued share capital.

Stock buybacks refer to the repurchasing of shares of stock by the company that issued them. A
buyback occurs when the issuing company pays shareholders the market value per share and re-
absorbs that portion of its ownership that was previously distributed among public and private
investors.

Here are reasons Dangote Cement is buying back shares

 To increase long term shareholder value – Considering the review of the company’s
share price and prevailing equity market conditions, the board of Dangote Cement believes
that at the current market valuation values, the initiative is considered as one of the
appropriate capital allocation decisions to improve long term shareholder value.
 Tool for managing capital structure, balance sheet efficiency – The exercise is expected
to support the cement manufacturer’s continuous capital structure and balance sheet
optimization process. This means that repurchasing shares while improving financing and
balance sheets efficiency is expected to reduce the cost of capital and enhance investors’
value.
 Return cash to shareholders – While some investors prefer cash distributions, others
would choose to stay invested in a company. To cater to both, Dangote Cement decided to
use a combination of dividends distribution and share buybacks to strike the right balance.
 The initiative would help reduce the number of shares outstanding and increases the
proportional rights of any single share. This means that the earnings per share (EPS)
would be higher due to the share buy back and shareholders that want to remain invested in
the company in the long term would benefit from this.

During the EGM, which will hold at Eko Hotels and Suites in Victoria Island, Lagos, the
company’s board will also be seeking approval to pursue all necessary means towards
ensuring the actualization of this plan.