CORPORATE

REPORTING

Suggested Answers
MARCH-APRIL 2021
Questions:
Marks
1. You are Arif Sazzad currently working as Audit Manager in Saad & Khalid, Chartered Accountants
(S&K). S&K has been engaged in audit of group reporting package of Apparel Bangladesh Company
Limited (ABC Limited). You have been assigned as the engagement manager and you report to
Khalid Mahmud, the engagement partner who is looking after ABC Limited Audit for several years.
You have received following email from the engagement partner Khalid
Mahmud: Hi Arif,
We have been once again appointed to audit the group reporting pack of ABC Limited for the year
ended 30 June 2020. As you are new to this engagement, let me brief you some background
information.
ABC Limited is a Bangladesh subsidiary of Prominent Holdings Limited (Prominent) from United
Kingdom. ABC Limited was incorporated on 01 July 2013 and it is engaged in production of
Sportswear and business wear in Bangladesh and business of ABC has grown since then. In 2017,
ABC acquired 95% shares of Denim First Limited (DFL) to expand its business in Denim items. In
2018, Garments Support Limited (GSL), one of the key suppliers of ABC Limited and DFL, was
facing liquidity crisis. In order to ensure stable supply chain, ABC Limited acquired 25% shares of
GSL so that it can influence the operation of GSL.
Prominent has operation in 20 Countries. For better management and control of operation, Prominent
has policy to prepare a Country Reporting Pack (CRP) in GBP (UK Currency) after consolidating all
the operations of a country.
I have received an email from Mr. Shafiq, CFO of ABC Limited (Exhibit 1) this morning where he
shared the stand-alone financial statements of ABC Limited, DFL and GSL. He also requested
assistance for proper treatment of some reporting issues. I want you to:
Requirements:
a) Draft and email where you set out and explain the appropriate adjustments for the financial
reporting queries raised by Mr. Shafiq (Exhibit 1) for stand-alone financial statements of ABC
Limited for the year ended 30 June 2020. 12
b) Prepare the Consolidated Statement of Financial Position, Consolidated Statement of Profit or
Loss and Other Comprehensive Income for Bangladesh Operation. Consider the effect of
adjustments raised by Mr. Shafiq where applicable. 20
c) Prepare Country Reporting Pack (CRP) after translating the Consolidated financial statements in
GBP (UK Currency). 8
Exhibit 1: Email from Mr. Shafiq, CFO of ABC
Limited From : Mr. Shafiq, CFO of ABC Limited
To : Khalid Mahmud, Partner, Saad & Khalid, Chartered Accountants
Subject : Stand-alone financial statements
Dear Mr. Mahmud
I’m sharing the stand-alone draft financial statements of ABC Limited, Denim First Limited
(DFL) and Garments Support Limited (GSL) (Exhibit 2) for the year ended 30 June 2020. You
can commence your audit works on these financial statements. In addition, I have shared
some
information related to consolidation (Exhibit 3 and Exhibit 4).
We have come across some issues while preparing the financial statements of ABC Limited for
which we will need your assistance. I am not sure how to address these issues. Pleas suggest us
how to address these issues and appropriate entries to incorporate them in the stand-alone
financial statements of ABC Limited.
Issue 1: Interest free loan to employees.
As part of employee retention strategy, ABC approved a scheme on May 2020 that eligible
employee will be allowed to take interest free loans maximum 5 times of their gross salary. Loan
amount will be repayable in 6 to 24 months instalments which will be deducted from employee
salary. On 30 June 2020, one of the senior level employees has taken a loan for BDT 420,000
which will deducted in 24 equal monthly instalments from his salary paid at the end of month.
Our record shows that the incremental borrowing rate for the employee was 11%. Loan paid to
the employee has been recorded as trade debtors.
Issue 2: Revenue recognition
During month of May, ABC received 2 orders from separate customers with option for partial
delivery.
First customer Sparrow Limited ordered 500 pcs of particular styled sports jersey at a total price
of BDT 57,500. Of the ordered quantity, 300 pcs have been delivered by 15 th June 2020 when the
customer has requested to supply further 700 pcs of jersey at total of BDT 65,500 after a regular
volume discount of 5% on the new order. Another 300 pcs have been delivered at the year end.
Second customer, Verdin Limited, has ordered 480 pcs of jersey with its brand at a price of BDT
67,200. After delivering the 280 pcs of jersey on 20 th June, ABC Limited has identified that they
have produced total of 820 pcs jersey instead of 480 pcs. On management request, Verdin has
agreed to purchase the extra produced jerseys but at a significant lower price. Verdin has
demanded 40% discount on the extra jerseys which management has agreed. ABC delivered
further 400 pcs of jerseys to Verdin by the year end.
None of these sales has been recognized at the year-end but the cost of revenue has already been
incorporated in the financial statements of ABC Limited.
Kindly assist us to address these issues and finalize the stand-alone financial statements. We will
be waiting for your response.
Shafiq

Exhibit 2: Stand-alone FS of ABC Limited, DFL and GSL for YE 30 June 2020.

ABC Limited DFL GSL

BDT BDT BDT
Non-current Assets
Investment in DFL 566,589 - -
Investments in GSL 22,605 - -
Marketable Securities - 232,323 -
Property, Plant & Equipment 163,727 99,567 35,562
752,921 331,890 35,562
Current Assets
Inventories 331,838 462,187 15,311
Advance & prepayments 61,236 44,544 3,186
Trade Debtors 505,112 665,650 7,078
Receivables from ABC Limited - 364,122 126,701
Fixed Deposits in bank 18,723 - -
Cash & Cash equivalents 19,074 20,561 17,485
935,983 1,557,064 169,761

Total Assets 1,688,904 1,888,954 205,323

Equity
Share Capital (BDT 1 per share) 1,000 566,600 11,860
Retained Profits 106,760 628,698 127,125
107,760 1,195,298 138,985
Non-current Liabilities
Gratuity Payables 154,937 83,267 21,314
154,937 83,267 21,314
Current Liabilities
Trade Payables 629,498 439,305 7,140
Liability for bill discounted 39,816 4,696 17,094
Bank Borrowings - 15,569 9,302
Payable to DFL & GSL 490,824 - -
Provision for Income Tax 23,972 16,879 1,102
Accruals & expense provisions 242,097 133,940 10,386
1,426,207 610,389 45,024

Total Liability & equity 1,688,904 1,888,954 205,323

Statement of Profit or Loss & Other Comprehensive Income

For the year ended 30 June 2020

ABC Limited DFL GSL

BDT BDT BDT

Sales to external customers 4,311,681 2,274,382 13,286

Sales to intercompany - - 274,216
Total revenue 4,311,681 2,274,382 287,502
Cost of Revenue (2,889,864) (2,054,364) (165,057)
Gross Profit 1,421,817 220,018 122,445
General & Admin Expenses (1,012,964) (361,605) (83,718)
Other Income 76,860 85,922 11,205
Operating Profit 485,713 (55,665) 49,932
Finance cost (96,492) (72,060) (330)
Profit before tax 389,221 (127,725) 49,602
Tax expenses (21,373) (18,178) (1,036)
Profit for the year 367,848 (145,903) 48,566
Other comprehensive income - - -
Total comprehensive income 367,848 (145,903) 48,566

Exhibit 3: Additional information for consolidation.

 ABC acquired 95% of DFL shares of BDT 1 on 30 June 2017 when DFL had an
accumulated loss of BDT 28,500.
 25% of total shares of GSL were acquired on 01 July 2019.
 During the year GSL sold inventories to ABC Limited worth of BDT 274,216 out of which
inventories of BDT 74,000 remained at ABC Limited’s warehouse. GSE made a margin of
30% on these sales.
 During the year no sales transaction took place between ABC Limited and DFL.
Exhibit 4: Exchange rates of BDT to

GBP01 Jul 2013 : BDT 128.2/ GBP

01 Jul 2019 : BDT 110.1/ GBP
 31 Dec 2019 : BDT 107.1/ GBP
30 Jun 2020 : BDT 107.3/ GBP
2. AXZ Ltd. whose financial year ends on March 31 applies IFRS for SMEs in preparing its financial
statements.
Draft profit of AXZ for the year ended on March 31, 2021 was BDT 168,456,000.
The following are some of the adjustments included in the said draft financial statements.
(i) AXZ measures subsequently its investment property at fair value. Initial recognition of the
investment property was on 1 June 2016 at a cost of BDT 600 million. The fair value of the
property reflected in the financial statements for the year ended 31 March 2019 was BDT 675
million. AXZ noticed that the fair value of its investment property cannot be measured reliably
without undue cost and effort as at 31 March 2020 and 31 March 2021. Therefore, the
company did the following adjustments in the financial statements.
- Acquisition cost of the investment property was considered as the carrying value as at 31
March 2020.
- Depreciation recorded for the current year was calculated based on the straight line
method using its remaining useful life of 10 years.
(ii) AXZ received BDT 150 million as a government grant to carry out work related to Phase 1 of a
special water project in a rural area. Based on the terms attached to the said grant, AXZ is
required to complete Phase 1 on or before 31 March 2021. If AXZ fails to meet the said
requirement, the government will impose a fine, which will be deducted from the amount to be
given for Phase 2. As at 31 March 2021, AXZ was able to complete only 80% of the project
work. AXZ recognised BDT 120 million (80% of BDT 150 million) as revenue for the year and
reflected the balance BDT 30 million as a liability.
Requirements:
a) Recommend the management on the required adjustments to be made in accordance with IFRS for
SMEs. 8
b) Calculate the revised net profit for the year ended 31 March 2021 incorporating any adjustments
resulting from the application of IFRS for SMEs. 5
3. Shuvo Das & Co. Chartered Accountants is auditor of Bright Energy Limited which is engaged in
trading of generators. You are assigned as audit manager for the year ending 31 March 2021 and
currently performing planning & risk assessment procedures. You have received following draft
financial statements from the management.
Statement of Financial Position
2021 2020
ASSETS BDT BDT
Non-current assets
Property, plant and equipment 1,802,757 1,407,786
Deferred tax assets 73,120 91,493
Intangible assets 104,477 70,969
1,980,354 1,570,248
Current assets
Advances, deposits and pre-payments 7,142,745 3,884,765
Inventories 15,852,938 14,102,157
Trade and other receivables 1,201,720 140,985
Cash and cash equivalents 5,812,482 2,533,409
30,009,885 20,661,316
Total assets 31,990,239 22,231,564
EQUITY AND LIABILITIES
 Equity
Share capital 16,582,000 15,128,000
Retained earnings 2,234,060 482,563
18,816,060 15,610,563

Current liabilities
Trade payables 8,886,059 3,782,861
Provisions and other liabilities 4,288,120 2,838,140
13,174,179 6,621,001

Total equity and liabilities 31,990,239 22,231,564

Statement of Profit or Loss and Other Comprehensive Income

2021 2020
Revenue 27,762,823 25,039,760
Cost of sales (20,335,747) (19,222,492)
Gross profit 7,427,076 5,817,268
Operating expenses (3,215,021) (3,452,654)
Profit from operation 4,212,055 2,364,614
Finance income 638,700 (162,903)
Profit before tax 4,850,755 2,201,711
Income tax expense (1,645,091) (747,544)
Net profit/(loss) after tax 3,205,664 1,454,167
Other comprehensive income/(expense) - -
Total comprehensive income for the year 3,205,664 1,454,167
Requirement:
Analyse and comment on the financial statements of Bright Energy Limited.
10
4. a) Ganga Limited is a listed company and prepares interim financial statements. On its interim
financial statements for the half year ended, it identified that there are events and conditions
present which requires to impair its goodwill arising from purchase of acquisition and
accordingly an impairment loss was recognized. However, by the of year end, those events and
conditions has reversed. As those conditions are not present at the year end, Ganga Limited
has reversed the impairment loss in its financial statements. You are manager of the audit of
Ganga Limited’s financial statements for the year end.
Requirements:
i)
Discuss about the events and conditions leading to impairment of assets. 3
ii) Comment on reversal of impairment loss at the year end. 3
iii) What would be your audit responses related to impairment of goodwill? 3
b) Chitra Garments Limited is engaged in manufacturing and export of Garments products. It’s
financialstatements for the year ended 31 December 2020 is currently being audited by its
auditor. Ever sinceCOVID-19 outbreak, Chitra has experienced with significant decline in the
sale revenue. Customershas instructed Chitra to hold the manufactured goods until further
notice. As a result, Chitra reportedSignificant number of finished inventories at the financial
statements. According to the sales agreement, Chitra is not able to sell these inventories locally
or the third parties. Chitra has not keptany allowance for the unsold inventories However,
subsequent to year end and before the audit reportis issued, Chitra has come to know that its
customer has become bankrupt.
Requirements:
i)
Discuss the procedures to be performed to check the subsequent events. 4
ii) Discuss whether any adjustments are required for subsequent events. 2
 c) You firm is currently auding Halda Limited where you are assigned as engagement manager.
During the audit you have noted that significant amount of inventory has been written off.
Upon inquiry, management informed you that these inventories are non-existent.
Management informedyou that their store in-charge sold off inventories without
management awareness. Store manageruse to increase the number of inventories to be
delivered in delivery challan to bring the inventoriesout warehouse. Then the extra inventory
would be sold off for his personal benefit. Management analysis shows that store in-charge
was involved in fraudulent activities for last 3 years. Your
review of purchase and sales process shows that store in-charge was solely responsible for
recording goods receipts and issuing delivery challans.
Requirements:
i) What would be your audit procedures related to identified fraud? 3
ii) Suggest appropriate controls to address the fraud risk. 2
5. You are Sinthia Ahmed, a qualified Chartered Accountant, working in a reputed CA firm in the
position of Audit Director. You are currently reviewing the audit of Active Products Limited (APL),
a manufacturer of industrial equipment and machineries, for the year ended March 31, 2021. The
audit work is almost done and you review the audit files to draft a report to those charged with
governance. The statement of financial position of APL as at 31 March 2021 shows total assets of
BDT 12,090 million (31 March 2020 – BDT 10,230 million).
From the audit files you have found following points that may be relevant for your intended purpose:
Farjana , a last level articled student, worked on property, plant and equipment of APL and she wrote
in the working paper that controls over capital expenditure transactions had deteriorated during the
year from the Company’s regular practice. Authorisation had not been granted for the purchase of
office equipment with a cost of BDT 34.875 million. She also wrote that no material errors in the
financial statements were revealed by audit procedures performed on property, plant and equipment.
Ali Ashraf, assistant manager of the firm works as audit senior of APL audit, worked on intangible
assets and wrote in working paper that an internally generated brand name has been included in the
statement of financial position at a fair value of 1,550 million. Working paper showed that enquiry
was made to CFO who responded that BDT 1,550 million represents the present value of future cash
flows estimated to be generated by the brand name. Ali Ashraf commented that this treatment
appears to be in breach of IAS 38 Intangible Assets, and that the management refuses to derecognize
the asset even though they have been shown the relevant section of IAS 38.
From the working file of inventories, it is seen that problems were experienced in the audit of
inventories. Due to a misunderstanding by the internal auditors of APL, the external audit team did
not receive a copy of inventory counting procedures prior to attending the count. This caused a delay
at the beginning of the inventory count, when the audit team had to quickly familiarize themselves
with the procedures. In addition, on the final audit, when the audit senior requested documentation to
support the final inventory valuation, it took two weeks for the information to be received because
the accountant who had prepared the schedules had mislaid them.
Requirement:
Draft the points that will be brought attention to those charged with governance and explain the reason
for their inclusion and consequences of each points. 12
6. You have recently joined Abul Hasanat & Co (AHC), Chartered Accountants as audit manager and
currently been assigned to two the audit client. Following issues has arisen in your audit clients.
1. Comfort Real Estates and Design Limited (CREAD).
CREAD is involved in providing architectural design solutions and constructing real states.
AHC has no experience of auditing a real estate company. Mr. Hasanat, proprietor of the firm,
believes that auditing a real estate company will develop firm’s capabilities and portfolio of
auditing real estate sector. In order to penetrate in this sector, AHC has quoted a lower-fees to
CREAD which rewarded this audit engagement. Audit team is facing difficulties in
performing audit procedures as none of them have adequate knowledge the business model
and operations of real estate business.
2. Anika Textiles Limited (ATL)
ATL is an audit client of AHC for several years. Audit process was always smooth. Current
year audit team consists of members who was also part of previous year audits. As your first
year of involvement, you had a meeting with various department heads of ATL including
board of directors. At time of discussion with finance manager, you came to know that one of
your team members helped ATL in preparation of annual financial statements. Your partner
and other team members were not aware of this information.
Requirement:
Identify the ethical issues in each case and suggest appropriate responses. 5
Answer to the Question # 1
Requirement (a):
From : Khalid Mahmud, Partner, Saad & Khalid, Chartered Accountants
To : Mr. Shafiq, CFO of ABC Limited

Subject: Draft report on identified issues

Dear Mr. Shafiq,

Thank you for sharing the stand-alone financial statements. We will commence our audit works as early as
possible. In your email, you have mentioned some issues for which you wanted assistance. We have discussed
them below for your understanding and proper recording of the related transactions.
Interest free loan to employees.

Interest free loan provided to employees fall under definition of financial instruments under IFRS 9. As set out
in the standards, all financial instruments should be initially measured at fair value.
In order to find the fair value of the interest free loan as at 30 June 2020, we need to determine the cash flows
and calculate the present value of the loan.
As you mentioned, Loan amount is BDT 420,000 which will be paid in 24 EMIs. Incremental borrowing rate
for the employee is 11%. That means monthly rate is 11%/12 =0.917% and will be collected after the month
end when it will be deducted from salary.
Using the present value calculation for annuity, present value of the loan becomes 375,457. That means there is
a loss of BDT 44,543 which need to be taken to Profit or loss. However, as this is for the purpose of employee
benefit, you can recognize the loss to employee benefit expenses.
As the interest free loan will remain interest free till the repayment, it means that employee has already fulfilled
the required conditions.
You should pass following entry to adjust the trade debtors:

Employee benefits Expense Dr. 44,543

Loan to employees Dr. 375,457
Trade debtors Cr. 420,000

Revenue recognition:
IFRS 15 will be followed to address the issue with revenue recognition. Here, the additional contract represents
typical contract modification, as the order quantity changes and the total transaction price changes, too. As both
of the customer has agreed to increase the order quantity from their initial contact, we will need to analysis
whether these changes from the ignition order constitutes lease modification.
IFRS 15 precisely specifies how to account for contract modifications, based on the terms of modification.
There are 2 basic types of contract modification: Separate contract or Not a sperate contract.
Contract modification will be a new contract if additional goods are distinct and consideration for additional
goods reflects their stand-alone price. On the other hand, lease modification will not lead to a separate contract
if additional goods are not distinct or consideration for additional goods does not reflect their stand-alone price.
In case of Sparrow, first customer, the price for additional goods indeed reflects their stand-alone selling prices,
because ABC Limited normally provides 3% volume discount. Therefore, this contract modification is
accounted for as a separate contract and revenue for the year ended 30 June 2020 for 600 pcs delivered goods
will be:
BDT 57,5000 for the original contract for 500 Jersey;
BDT 9,357 [65,500 x 100/700] from the new contract for additional 100 pcs
delivered. Total revenue from sparrow for the year ended 30 June 2020 will be BDT
66,857.
In case of Verdin Limited, the second client, it’s clear that the price for additional jersey does not reflect their stand-
alone selling prices, because 40% discount is exceptional and attempt to recover cost of excess production.It means
that the second criterion is not met. As a result, the contract modification is NOT a separate contract, but it is bundled
with the original contract.
For the goods delivered prior to contract modification, revenue should be recognized as per the original
contract. After the contract modification considers need to be allocated amount the performance obligations i.e.
remaining undelivered goods. Here, consideration should be allocated in following manner:
Undelivered goods from initial contract = 200 Pcs
Additional goods to be delivered = 360 Pcs
Total quantity to be delivered = 560 pcs

Considerations:
Remaining consideration from original contract = [67,200 x 200/480] = 28,000
Consideration for additional goods = [360 x (67,200/480) x (1-40%)] = 30,240
Total consideration to be recognized as revenue = 58,240.
Consideration for per unit of performance obligation = [58,240 / 560] = 104.

So, revenue to be recognized as

Revenue for delivered goods prior to contract modification = [ 67,200 – 28,000] = 39,200
Revenue for delivered goods after contract modification = [400 x 104] = 41,600
Total revenue = 80,800

In order to recognize revenue from both customers, following entry need to be passed:
Accounts Receivable Dr. 147,657
Sales Cr. 147,657
[80,800 +66,857]

If you pass the journals in above mention process, you can address the issues and incorporate them in the financial
statements.

Sincerely,
Khalid
Khalid Mahmud,
Partner,
Saad & Khalid, Chartered Accountants
Requirement (b):

Statement of Financial Position

ABC Limited DFL Adj from R1 Consol Adj Consolidated

Non-current Assets
Investment in DFL 566,589 - - (566,589) -
Investments in GSL 22,605 - - 12,142 34,747
Marketable Securities - 232,323 - - 232,323
Property, Plant & Equipment 163,727 99,567 - - 263,294
Goodwill (W2) - 55,394 55,394
752,921 331,890 - (499,053) 585,758
Current Assets
Inventories 331,838 462,187 - (5,550) 788,475
Advance & prepayments 61,236 44,544 - - 105,780
Loan to employees - - 375,473 - 375,473
Trade Debtors 505,112 665,650 (272,343) - 898,419
Receivables from ABC Limited - 364,122 - (364,122) -
Fixed Deposits in bank 18,723 - - - 18,723
Cash & Cash equivalents 19,074 20,561 - - 39,635
935,983 1,557,064 103,130 (369,672) 2,226,505

Total Assets 1,688,904 1,888,954 103,130 (868,725) 2,812,263

Equity
Share Capital 1,000 566,600 - (566,600) 1,000
Retained earnings 106,760 628,698 103,130 2,232 840,820
Minority interest (W3) - 59,765 59,765
107,760 1,195,298 103,130 (504,603) 901,585
Non-current Liabilities
Gratuity Payables 154,937 83,267 - - 238,204
154,937 83,267 - - 238,204
Current Liabilities
Trade Payables 629,498 439,305 - - 1,068,803
Liability for bill discounted 39,816 4,696 - - 44,512
Bank Borrowings - 15,569 - - 15,569
Payable to DFL & GSL 490,824 - - (364,122) 126,702
Provision for Income Tax 23,972 16,879 - - 40,851
Accruals & expense provisions 242,097 133,940 - - 376,037
1,426,207 610,389 - (364,122) 1,672,474

Total Liability & equity 1,688,904 1,888,954 103,130 (868,725) 2,812,263

 ABC DFL Consol
Consolidated
Limited Limited Adj
Sales to external customers 4,311,681 2,274,382 - 6,586,063
Sales to intercompany - - - -
Total revenue 4,311,681 2,274,382 - 6,586,063
Cost of Revenue (2,889,864) (2,054,364) - (4,944,228)
Gross Profit 1,421,817 220,018 - 1,641,835
General & Admin Expenses (1,012,964) (361,605) - (1,374,569)
Other Income 76,860 85,922 - 162,782
Share of profit from associate (W6) - - 6,592 -
Operating Profit 485,713 (55,665) - 436,640
Finance cost (96,492) (72,060) - (168,552)
Profit before tax 389,221 (127,725) - 268,088
Tax expenses (21,373) (18,178) - (39,551)
Profit for the year 367,848 (145,903) 6,592 228,537

Workings 1: Net asset

calculationDFL Net assets
Particulars Balance sheet Acquisition Post-acquisition
date date date
Share capital 566,600 566,589 -
Retained Earnings 628,698 (28,500) 657,198
Net asset 1,195,298 538,089 657,198

GSL Net assets

Particulars Balance sheet Acquisition Post-acquisition

date date date
Share capital 11,860 11,860 -
Retained Earnings 127,125 78,559 48,566
Net asset 138,985 90,419 48,566

Workings 2: Goodwill calculation

Cost of Investments = 566589
Share of net asset acquired
(538,089 x 95%) = (511,185)
Goodwill = 55,404

Workings 3: Minority interest

Net asset of DFL at year end = 1,195,298
Minority interest rate = 5%
Total minority interest = 59,764

Workings 4: Investments in associates

Net profit of GSL Limited = 48,566
Ownership % = 25%
Investment to be increased = 12,142

Workings 5: Adjustments for unrealised profit

PURP (74,000 x 35%) = 22,200
PURP for ABC Limited (25%) = 5,550

Workings 6: Calculation of retained earnings

Share of post-acquisition R/E of GSL (25%) (W4) = 12,142
Provision for unrealised profit in GSL = (5,550)
Share of profit in associate = 6,592
 Workings 7: R/E of ABC Limited
As per question = 106,760
Add: from requirement 1 = 103,130
Total R/E of ABC Limited = 209,890

Workings 7: Calculation of retained earnings

R/E of ABC Limited (100%) = 209,890
Share of post-acquisition R/E of DFL (95%) = 624,338
Share of post-acquisition R/E of GSL (25%) (W6) =
6,592
Total = 840,820

Requirement (c):

As per IAS 21, Statement of Profit or loss should be translated using average rate and Statement of Financial
Position should be translated using Closing rate. However, Equity components should be translated using
historical rate. Any difference then will be taken to translational reserve in the equity.

From the rates provided in the question, Average rate for 2019 will be

1-Jul-19 110.1
31-Dec-19 107.1
30-Jun-20 107.3

Average 108.2

Country Reporting Pack in GBP:

Country Reporting Pack- SPLOCI

For the year ended 30 June 2020
Applicable
CSPLOCI CRP
rate
BDT GBP

Sales to external customers 6,586,063 108.2 60,869

Sales to intercompanies - 108.2 -
Total revenue 6,586,063 108.2 60,869
Cost of Revenue (4,944,228) 108.2 (45,695)
Gross Profit 1,641,835 108.2 15,174
General & Admin Expenses (1,374,569) 108.2 (12,704)
Other Income 162,782 108.2 1,504
Share of profit from associate 6,592 108.2 61
Operating Profit 436,640 108.2 4,035
Finance cost (168,552) 108.2 (1,558)
Profit before tax 268,088 108.2 2,478
Tax expenses (39,551) 108.2 (366)
Profit for the year 228,537 108.2 2,112
Other comprehensive income - 108.2 -
Total comprehensive income 228,537 108.2 2,112
Country Reporting Pack- SFP
As at 30 June 2020
Applicable
CSFP CRP
rate
BDT GBP
Non-current Assets
Investments in GSL 34,747 107.3 323.83
Marketable Securities 232,323 107.3 2,165.17
Property, Plant & Equipment 263,294 107.3 2,453.81
Goodwill 55,394 107.3 516.25
585,758 5,459
Current Assets
Inventories 788,475 107.3 7,348.32
Advance & prepayments 105,780 107.3 985.83
Loan to employees 375,473 107.3 3,499.28
Trade Debtors 898,419 107.3 8,372.96
Fixed Deposits in bank 18,723 107.3 174.49
Cash & Cash equivalents 39,635 107.3 369.38
2,226,505 20,750

Total Assets 2,812,263 26,209

Equity
Share Capital 1,000 128.2 7.80
Retained earnings 840,820 108.2 7,771
Translation reserve 66.69
Minority interest 59,765 107.3 556.99
901,585 8,402
Non-current Liabilities
Gratuity Payables 238,204 107.3 2,219.98
238,204 2,220
Current Liabilities
Trade Payables 1,068,803 107.3 9,960.89
Liability for bill discounted 44,512 107.3 414.84
Bank Borrowings 15,569 107.3 145.10
Payable to DFL & GSL 126,702 107.3 1,180.82
Provision for Income Tax 40,851 107.3 380.72
Accruals & expense provisions 376,037 107.3 3,504.54
1,672,474 15,587

Total Liability & equity 2,812,263 26,209

 Answer to the Question #

Requirement (a):

Investment property

Per paragraph 16.8 of the SME standard, if a reliable measure of fair value is no longer available without undue
cost or effort for an item of investment property measured using the fair value model, the entity shall thereafter
account for that item in accordance with Section 17 until a reliable measure of fair value becomes available.
The carrying amount of the investment property on that date becomes its cost under Section 17. Paragraph
16.10(e)
(iii) then requires disclosure of this change. It is a change of circumstances and not a change in accounting policy.

Recording the investment property at cost on 31 March 2020, as the fair value could not be measured without
undue cost or effort, is not correct. AXZ has to consider the carrying value of BDT 675 million as the cost as at
31 March 2020 and it should be depreciated over the remaining useful life until a reliable measure of fair value
becomes available. Accordingly, depreciation that should be recognized for the year is BDT 67.5 million and
not BDT 60 million, and the carrying value of the investment property as at 31 March 2021 should be BDT
607.5 million

Government grant

An entity shall recognise government grants that impose specified future performance conditions on the
recipient in the income statement only when the performance conditions are met. Grants received before the
revenue recognition criteria are satisfied will be recognised as a liability.

Since the performance conditions were not met as at 31 March 2021, AXZ cannot recognise any revenue for the
year. The entire grant amount should be recognized as a liability. Therefore, adjustments made by AXZ are not
accurate per the requirements of the SME standard. If the company has to pay a fine, that amount should be
recognised as an expense.

Requirement (b):

Tk.
Profit per the draft financial statements 168,456,000
Reversal of incorrect depreciation 60,000,000
Correct depreciation (67,500,000)
Reversal of government grant recognized as revenue (120,000,000)
Adjusted net profit 40,956,000
Answer to the Question #
Analysis of the financial Position:

Key ratios:
2021 2020 % change

𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠
Short term solvency ratio

𝐶𝑢𝑟𝑟𝑒𝑛𝑡
Current Ratio 2.88 3.12 -27%

𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
𝐶𝑎𝑠ℎ & 𝐶𝑎𝑠ℎ
𝐸𝑞𝑢𝑣𝑎𝑙𝑒𝑛𝑡𝑠
Cash ratio 0.44 0.38 15%

𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
𝑁𝑒𝑡 𝐷𝑒𝑏𝑡
𝐸𝑞𝑢𝑖𝑡𝑦
Gearing Ratio 0.70 0.42 65%

Performance ratio
𝑁𝑒𝑡 𝑃𝑟𝑜𝑓𝑖𝑡
𝑇𝑜𝑡𝑎𝑙 𝐸𝑞𝑢𝑖𝑡𝑦
Return on capital
17% 9.3% 82.9%
employed
𝑁𝑒𝑡 𝑃𝑟𝑜𝑓𝑖𝑡
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡
Return on assets 10% 6.5% 53%

Efficiency Ratio
𝑅𝑒𝑣𝑒𝑛𝑢𝑒
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡
Asset turnover 0.87 1.13 -23%

𝑅𝑒𝑣𝑒𝑛𝑢𝑒
𝑇𝑜𝑡𝑎𝑙 𝐸𝑞𝑢𝑖𝑡𝑦
Net asset turnover 1.48 1.60 -8%

Commentary from ratio analysis:

Solvency of the entity:

Analysis of financial position of BEL indicates that Company has strong financial position. BEL has current ratio
2.88 which is higher than current ratio of 2 which is considered to be standard. Despite a decreased from
previous year ratio of 3.12, BES still has strong ability to meet its current obligation. Cash ratio analysis shows
that it has been increased to 0.44 from previous 0.38 which indicates that BEL has sufficient cash back up to
pay off its current liabilities. Analysis of the solvency ratios shows that BEL has a healthy financial position.
Performance ratios of the entity:
From the analysis of the performance ratio, it can be noticed that Pearl Limited is consistently generating
positive returns for the shareholders utilizing its assets. In 2021 return on ROCE was 17% which has almost
doubled (82.9%) from previous 9.3%. Return on total asset is also increased to 10% from previous 6.5% from
previous year despite significant increase in PPE, Inventories and Trade receivables. This means BEL has
shown a super performance during the year in adding value to the shareholder’s wealth.

Efficiency ratios of the entity:

Efficiency ratio aims to show how efficient an entity is in case of generating revenue utilizing its assets.
Efficiency ratios shows that BEL was not efficient enough compared to previous year in generating sufficient
revenue utilizing its assets or equity. Both asset turnover and net asset turnover has dropped from previous year
despite significant increase in revenue. It could be possible that there has been significant addition in PPE and
inventory together with outstanding receivables caused in surge of total asset which led to decline in the
efficiency ratio. BEL management might need to focus on increase its efficiency in utilizing its assets and
equity.
Analysis of Statement of profit or loss:

2021 2020 Change Change %

Revenue 27,762,823 25,039,760 2,723,063 10.9%

Cost of sales (20,335,747) (19,222,492) (1,113,255) 5.8%

Gross profit 7,427,076 5,817,268 1,609,808 27.7%

GP % 26.8% 23.2%

Net profit 3,205,664 1,454,167 1,751,497 120.4%

Net profit % 11.5% 5.8%

Commentary:
Analysis shows that BEL’s current year revenue (BDT 27,762,823) increased significantly (10.9%) compared
to previous year revenue of 25,039,760. Cost of sales has also increase by 5.8% which supports revenue
increase growth rate. Like previous year, BEL has also made a significant gross profit this year (26.8%). Gross
profit increased to 26.8% from previous 23.2%.

Bel also seen significant amount of net profit this year. Net profit margin increased significantly to 11.5% from
previous net profit margin of 5.8%. This indicates that operating expenses remained in similar level. Overall
analysis of the statement of profit or loss shows BES has a successful year in terms of revenue and profit.
Answer to the Question # 4

Requirement

Events and conditions that lead of impairment of assets

 Decline in market value
 Negative changes in technology, markets, economy, or laws.
 Increases in market interest rates
 net assets of the company higher than market capitalisation
 obsolescence or physical damage
 asset is idle, part of a restructuring or held for disposal
 worse economic performance than expected
 for investments in other entities, the carrying amount is higher than the carrying amount
of theinvestee's assets.
 Dividend income from investments exceeds the total comprehensive income of the investee

Requirement (ii):

Comment on reversal of impairment loss

According to Financial Reporting Standards, in each reporting period, an impairment assessment should be
performed. It also requires that an impairment loss should be recognized when events or conditions for
impairments are met. As these conditions were present at the time of interim financial statements and
accordingly Ganga Limited recognized an impairment loss.
Financial Reporting Standard mention that once an impairment is recognized it cannot be reversed. Therefore,
impairment recognized at the impairment can not be reversed even if events and conditions of are no longer
present.
If Ganga Limited didn’t prepare interim financial statements, impairment assessment would be done at the year
end when events and conditions for impairment would not be present. In that case Ganga Limited would not
have to recognize the impairment loss.

Requirement (iii):

Audit response for impairment of goodwill:

 Obtain management assessment for impairment and check for accuracy of judgments and
informationused for assessment.
 If management assessments are not present or unacceptable, make an auditor’s own assessment
to identifywhether events and conditions for impairment are present.
 Check the accuracy of impairment amount.
 Check the accumulated impairment loss for the impaired asset and reconcile with impairment loss
for theyear.
 Check the entries posted and information disclosed in the financial statements.
 If impairment is not recorded or reported properly, suggest appropriate correction entries.
 If correction entries are posited, issue unmodified opinion. Otherwise issue a modified opinion.
Answer to the Question # 4

Requirement

Procedures to be performed:
 Obtaining an understanding of any procedure’s management has established to ensure that
subsequent eventsare identified.
 Read the entity’s latest available budgets, cash flow forecasts and other related management reports
forperiods after the date of the financial statements;
 Inquire, or extend previous oral or written inquiries, of the entity’s legal counsel concerning litigation
andclaims;
 Inquire management regarding new commitments., borrowings or guarantees have been entered to.
 Inquire management whether any assets have been appropriated by government or destroyed, for
example,by fire or flood.
 Check whether any unusual accounting adjustments have been made or are contemplated.
 Inquire management whether any events have occurred that are relevant to the recoverability of assets.
 Read board meeting minutes and AGM Minutes.
 Obtain written representation confirming that all events occurring subsequent to the date of the financial
statements and for which the applicable financial reporting framework requires adjustment or disclosure
have been adjusted or disclosed.

Requirement (ii):

Requirement of adjustments for subsequent events:

According to ISA, subsequent events that provide evidences of condition existed at the date of the financial
statements should be adjusted within the financial period. As the customer become bankrupt due to weak
financial conditions, it could be evidenced that the condition was present before the year end. Hence an
adjustment would be required to reduce the receivables from customers. At the same time inventories
would be adjusted as it could not be sold off to other customers or local customers.
Answer to the Question # 4

Requirement

Procedures to be performed:
 Inquire management how they have identified fraud and understand the affected area.
 Identify the inventories being written off and check the quantity and value of the inventory.
 Perform walkthroughs for goods receipt and delivery process.
 Identify the weakness in those process and controls available to address those weakness.
 Consider whether fraud could lead overstate the trade receivables as fraud was related to goods delivery.
 Perform a surprise stock count to check the quantity and controls over inventory management system.
 Check the entries being pass to write off the non-existent inventories.

Requirement (ii):

Suggested controls:
 Responsibility of store manager should be segregated to others.
 Goods receipt and delivery notes will be prepared by junior staffs and store manager will be
responsible forreview of goods receipt and delivery notes.
 Management should perform stock count on regular basis.
 Goods receipts and delivery could be automated and recorded in server to control stock movements.
 Automated system should perform 3-way match between customer order, delivery note and invoice
tocustomer.

Answer to the Question # 5

Matters to be included in management report and the reason for inclusion

• Control weakness

ISA 260 contains guidance on the type of issues that should be communicated. One of the matters identified is a
control weakness in the capital expenditure transaction cycle. The assets for which no authorisation was
obtained amount to 0·29% of total assets (34.875 m/ 12,090 m x 100%), which is clearly immaterial. However,
regardless of materiality, the auditor should ensure that the weakness is brought to the attention of the
management, with a clear indication of the implication of the weakness, and recommendations as to how the
control weakness should be eliminated.

The auditor is providing information to help those charged with governance improve the internal systems and
controls and ultimately reduce business risk. In this case there is a high risk of fraud, as the lack of authorisation
for purchase of office equipment could allow expenditure on assets not used for bona fide business purposes.
 • Disagreement with accounting treatment of brand

Audit procedures have revealed a breach of IAS 38 Intangible Assets, in which internally
generated brand namesare specifically prohibited from being recognised. APL has recognised an
internally generated brand name whichis material to the statement of financial position (balance
sheet) as it represents 12·82% of total assets (1,550/12,090 x 100%). The statement of financial
position therefore contains a material misstatement.

The report to those charged with governance should clearly explain the rules on recognition of
internally generated brand names, to ensure that the management has all relevant technical facts
available. In the report theauditors should request that the financial statements be corrected, and
clarify that if the brand is not derecognised,then the audit opinion will be qualified on the grounds
of a material disagreement – an ‘except for’ opinion wouldbe provided. Once the breach of IAS 38
is made clear to the management in the report, they then have the opportunity to discuss the matter
and decide whether to amend the financial statements, thereby avoiding a qualified audit opinion.

• Audit inefficiencies

Documentation relating to inventories was not always made readily available to the auditors. This
seems to be due to poor administration by the client rather than a deliberate attempt to conceal
information. The report shouldcontain a brief description of the problems encountered by the audit
team. The management should be made awarethat significant delay to the receipt of necessary
paperwork can cause inefficiencies in the audit process. This mayseem a relatively trivial issue,
but it could lead to an increase in audit fee. Management should react to these comments by
ensuring as far as possible that all requested documentation is made available to the auditors in a
timely fashion.

Answer to the Question # 6

CREAD engagement:
In CREAD engagement there are two ethical issues involved.
First, AHC has taken audit engagement from CREAD despite it having no experience of auditing
and understanding this real estate industry. Audit team doesn’t have adequate knowledge of the
operation and businessmodel of this industry. This shows that AHC had lack of professional
competence when CREAD engagement was taken.
Second, in order to penetrate in real estate industry audit and developing portfolio, AHC has
quoted lower audit fees instead of charging standard fees. This indicates violation of professional
behaviour.

Response to ethical issues identified:

 AHC should hire resources who sufficient knowledge and experience of auditing
real estate business.
 AHC should resign from the engagement if it fails to provide service with competence.
 AHC should charge CREAT for the budget overrun due to audit inefficiencies caused
by CREADmanagement.
ATL engagement:
As one of the team members is secretly helped ATL in preparation of financial statements, it this
shows independence has impaired. There is also risk of self-review threat.

Response to ethical issues identified:

 Immediately remove the team member in question from audit team.
 Confirm whether team’s independence has been impaired due to long association.
 Review the work done by the former team member and check in inadequacy.

x
 STRATEGIC
BUSINESS MANAGEMENT

Suggested Answers
MARCH-APRIL 2021
 Questions : Marks

1. (a) M/s. XYZ Ltd., has organized business as three divisions and Head Office. The divisions are
based on market groupings, which are Retail, Wholesale and Government. The divisions do
not trade with each other. The main method of control of the divisions has been the
requirement to earn a return on investment (ROI) of 15% per annum. The definition of
return and capital employed is provided by Head Office, as is the criterion rate of 15%. The
recent experience of M/s. XYZ Ltd., is that the group, as a whole, has been able to earn 15%
ROI but there have been wide variations between the results obtained by different divisions.
This infringes upon another group policy that forbids cross-subsidization i.e., every division
must earn the criterion ROI. M/s. XYZ Ltd., is now considering divestment strategies and
this could include the closure of one or more of-its divisions. The Head Office is aware that
the Boston Consulting Group (BCG) Matrix is widely used within the divisions in the
formulation and review of marketing strategies. As it is so widely known within the group
and is generally regarded by the divisions as being useful, the Head Office is considering
employing this approach to assist in the divestment decision.

Requirements:
i) Evaluate the use of ROI by M/s. XYZ Ltd., and its policy that forbids cross-
subsidization. 5
ii) Describe the extent to which the BCG could be applied by M/s. XYZ Ltd., in its
divestment decision. Evaluate the appropriateness of the use of BCG for this purpose. 5
(b) It is a fact that nearly all business environments are in a state of ongoing change or
disequilibrium. Companies must either stay aligned with changes in their competitive
environments and react to these changes promptly, or actively anticipate changes in
customer demographic, future technologies, and potential new products and services and
thereby recreate their industries. It should be noted that industry changes are requesting
answers from companies, especially entrepreneurial ones, for them to use the chance to
reshape themselves as well as their branch of business.

The risk of falling out of step with industry changes will almost certainly increase in the
future as competition intensifies; with existing and new technologies continue to be
exploited. Changes in consumer demographics lead to new customer needs. Organizational
change will, therefore, be essential to companies’ survival. “Organizational change
management and transformation have become permanent features of the business
landscape.” In fact, strategic management more appropriately be called “strategic change
management”.
Requirement:
Do you agree to the above statements? If so, please explain what are the limiting factors and
how management can deal with the issue by maintaining effective role and different
approaches to deal with the issues? 10
2. You are a Senior Associate in an advisory firm, Babul Rahman & Co. (BRC). One of its clients
is Saiham Bakery Private Limited (SB), which makes and distributes cold sandwiches to
superstores and small shops in Dhaka.
Mr Babul Kumar, a partner of BRC, called you for a meeting and shared the following exhibits
with you at the meeting. The exhibits were prepared by SB’s management team.
PART-A
Exhibit 1 Background notes
Cold sandwich market is very competitive and there are many small players in the market who
serve retail customers and superstores in their neighborhoods. Cold sandwiches are normally
eaten as lunch or light snacks and hence price point for cold sandwiches has to be kept at lower
end to drive volume. Health-conscious customers are gradually shifting towards fresh
sandwiches served by cafés and hence sales of cold sandwiches might decrease in medium to
long-term.
SB sells cold sandwiches to small shops and superstores in Dhaka. SB sells sandwiches mainly
under its own brand. However, its largest customer is Shop@Low, a well-known superstore in
Dhaka. Shop@Low sells SB’s sandwiches under its own brand. Though there are other suppliers
in Dhaka, Shop@Low buys cold sandwiches only from SB. SB charges Shop@Low lower
prices compared to prices it charges other retailers.

SB has recently made investment in new specialized machinery that can make larger quantities
of sandwich bread of consistent quality. SB’s factory is closed on Fridays. SB normally operates
at full capacity on four of the six other days of the week. The factory is not normally at full
capacity on Wednesdays and Thursdays. Weekly sales are consistent over the year.

Exhibit 2 Financial and operating data

Summary financial and operating data for the year ended 31 December 2020:
Shop@Low Other Total
customers
Revenue BDT’000 54,000 188,000 242,000
Variable costs BDT’000 36,000 94,000 130,000
Fixed costs BDT’000 - - 60,000
Operating profit BDT’000 - - 52,000

Number of sandwiches Units 900,000 2,350,000 3,250,000

sold
Receivables as at 31 Dec BDT’000 4,500 23,500 28,000
2020
Other information
At 31 December 2020, SB had an overdraft of BDT 24 million. The overdraft at 1 April 2021 is
forecast to be BDT 15 million and is the only component of cash and cash equivalents. Interest
is charged on the overdraft at 8% per annum. SB’s management intends to reduce the overdraft
to around BDT 2 million by June 2021, which they think is possible in the current
circumstances.

Production capacity, operating a six-day week, is 3.5 million sandwiches a year.

Operating profit is approximately equal to operating cash flows.
For the year ending 31 December 2021, SB expects that sales revenue from customers (other
than Shop@Low), variable costs per sandwich and annual fixed costs will be the same as they
were in the year ended 31 December 2020.

Exhibit 3 Business proposal from Shop@Low

The Shop@Low Board of Directors (BoD) is demanding that, from 1 April 2021, the SB BoD
revises the terms on which it trades with Shop@Low. Price competition between superstores is
fierce. Therefore, Shop@Low wants to reduce the price it charges its customers by BDT 5 per
sandwich. To compensate for this price reduction, it wants to reduce the price it pays to SB by
BDT 2 per sandwich. Also, under the current contract, the credit period for settlement with SB
is 30 days after delivery. Shop@Low is now demanding that the credit period should be
extended
to 90 days for deliveries from 1 April 2021. The Shop@Low BoD has made it clear that its
demands are not negotiable. If SB does not agree to the revised terms, the contract will be
terminated with effect from 30 March 2021. The Shop@Low BoD has stated that it expects the
volume of sandwiches it sells to increase by 11.5% as a result of reducing the price to its
customers. It believes that this volume increase will compensate SB for the lower price per
sandwich it will charge Shop@Low.

Requirements: PART-A
SB’s management asked BRC to help with strategic and financial analysis of issues they are
facing. To answer their queries, Mr Babul Kumar asked you to do the following:

(a) An analysis and explanation, with supporting calculations, of the financial impact of the
decision to renew the Shop@Low contract. In so doing, compare the operating profit
achieved by SB in the year ended 31 December 2020 with the expected profit for the year
ending 31 December 2021, with the new Shop@Low contract terms.
(b) Evaluate, with supporting calculations, the impact on SB’s liquidity and cash flows arising
from a change in the credit period from 30 days to 90 days.
(c) An explanation of the operating and strategic issues arising from a decision to accept the new
Shop@Low contract terms.

PART-B
Exhibit 4 Long-term planning and business sustainability
Because of expected adverse trends for the cold sandwich market, the SB board wants to assess
its profitability up to its planning horizon of 31 December 2023. This includes making an
operating profit forecast for the year ending 31 December 2023 based on some working
assumptions to test various scenarios.
The purpose of this exercise is to determine the long-term viability of the company and to assess
SB’s business sustainability if it continues to adopt its current strategy.
Working assumptions
The financial and operating data for the year ending 31 December 2021 will be identical to that
for the year ended 31 December 2020 (Exhibit 2). For this purpose, assume that the Shop@Low
contract will continue on its current terms for the year ending 31 December 2021.
There is a 60% probability that, after the year ending 31 December 2021, the sales volumes will
decrease at a compound rate of 1% per annum and a 40% probability that it will decrease
at a compound rate of 3% per annum for all customers.
There is a 70% probability that, after the year ending 31 December 2021, the selling price of
cold sandwich will decrease at a compound rate of 2% per annum and a 30% probability that it
will decrease at a compound rate of 4% per annum for all customers.
The variable cost per sandwich, after the year ending 31 December 2021, is expected to increase
at a compound rate of 2% per annum due to increase in cost of wheat and other raw materials.
Annual fixed operating costs, after the year ending 31 December 2021, is expected to increase
at a compound rate of 5% per annum.
Requirements: PART-B

(a) Prepare a forecast of the operating profit or loss for the year ending 31 December 2023. 7
Use the above working assumptions.
(b) Evaluate the implications of this forecast for SB’s business sustainability.
6
 PART -C
Exhibit 5: Accounts receivable factoring
In response to Shop@Low’s proposal for extension of credit period and consequent increase in
accounts receivable, SB’s management is thinking of accounts receivable factoring
opportunities.

Acceptance of Shop@Low’s proposal will increase accounts receivable from Shop@Low by

BDT 4.85 million in May 2021 and by another BDT 4.85 million in June 2021. Management of
SB is thinking of selling BDT 4.5 million of its accounts receivable in May 2021 and BDT 4.5
million in June 2021.

A debt factor has given the following proposal:

a. SB needs to pay a one -off credit protection insurance premium of 1.5% of factored
receivables;
b. SB will receive 100% of the factored receivables less insurance premium on the date of
sale;
c. SB will have to pay interest at 1% per month for three months on the amount advanced;
d. The sale agreement is without recourse.

Requirement: PART – C

Explain the financial reporting implications of the proposed sale of accounts receivable and advise 7
SB whether it should go for receivable factoring.

3. Online retail business is growing very fast worldwide. The global online retail market size is
valued over USD 5 trillion in 2020 and is expected to grow at a compound annual growth rate
(CAGR) 9.4% from 2021 to 2027 to exceed USD 8 trillion in 2027. Bangladesh is no
exception; present online retail market size is about USD 2 billion and is expected to exceed
USD 3 billion by 2023.
Channel VAS Ltd (CVAS) is a UAE based online retail market business is keen to enter in
Bangladesh. Growing organically will take considerable time because of factors like
development of efficient distribution system, winning trust of people, etc. To overcome this,
CVAS wants to acquire an already existing online retail business in Bangladesh (Beyond the
Rack).
In such a case, credible business valuation becomes critical. CVAS has engaged you to suggest
a price which Beyond the Rack Ltd (BTR) is worth acquiring.

You know that there are various approaches of business valuation and it would be appropriate to
determine value of BTR, based on each approach and subsequently apply fair value method to
assess the price at which, the business of BTR would be worth acquiring.

Financial statements and information of Beyond the Rack:

(III) Balance Sheet of Beyond the Rack Ltd as at June 30, 2020
Particulars Amount Particulars Amount
Share Capital 10.00 Fixed assets 42.50
(100,000 shares of Taka 100 inventories 20.00
each)
Reserve and surplus 28.50 Trade receivables 15.00
Long term borrowings 25.00 Cash and cash equivalents 4.50
Sort term borrowings 5.00
Trade payables 9.00
Other current liabilities 4.50
82.00 82.00
 (II) Income statement for the year ended on June 30, 2020
Particulars Amount
Revenue from operations 109.00
Expenses:
Cost of material consumed 37.40
Salary and allowances 42.30
Financial expenses 2.10
Depreciation and amortisation 7.70
Other expenses 1.00
Profit before exceptional and extraordinary items 90.50
Exceptional items 18.50
---
Profit before extraordinary items and taxes 18.50
Extraordinary items 2.00
Profit before tax 20.50
Taxes (35%) 7.18
Profit for the period from continuing operations 13.32

(III) Contingent liabilities

(i) Claims against company not acknowledged as debt (likely to be paid) BDT
600,000.
(ii) Guarantees (likely to be invoked) BDT 400,000

(IV) Future estimated free cash flows of the company for years 2021 to 2027 (explicit
period indicated as years 1 to 7)

Year 1 2 3 4 5 6 7
Amount in BDT million 18 20 22.50 28 27 29.50 30

(V) After the 7th year, the cash flows are estimated to remain stable. The WACC for the
company is 12 per cent.
(VI) Additional information:
(iii) Market value of fixed assets of the company is estimated at BDT 90,000,000.
(iv) Additional amount of expenses of BDT 1,000,000 per year for advertisement will
be required for smooth running of business in years to come.
(v) Value of goodwill is to be considered as equivalent to the present value of super
profits likely to accrue till perpetuity.
(vi) For the purpose of goodwill, super profits are to be computed on long term capital
employed.
(vii) Following weights will be given to each method:
 FCFF method 0.50
 Capitalisation method 0.20
 Assets based method 0.30
(viii) Weighted average cost of capital is 12 per cent.

Requirements:
(a) Calculate value of Beyond the Rack Ltd (BTR) using: 5
i) Discounted Cash Flow (Firm Free Cash Flow) Method 4
ii) Capitalisation of Earnings Method 3
iii) Asset Based Method 4
(b) Calculate fair value of BTR
 3. (a) NAM Bangladesh Limited (NAM) is a pharmaceuticals and animal health product company in
Bangladesh, listed with both Dhaka and Chittagong stock exchanges since 2010. NAM’s board
comprises of 9 (nine) members, two family members of the sponsor of NAM, the Chief
Executive Officer (CEO) and six independent directors. Mr. Yusfur Rahman and retired civil
servant and friend of Mr. H Kabir, founder of NAM is an independent director and chairman of
the board of NAM. Other directors include university teachers, economists, non-government
organisation (NGO) chairperson.
NAM has been growing solidly over the years but is facing substantial competition for last
two years which has affected growth in revenue and profit. In the last Annual General
Meeting of NAM, shareholders expressed their dissatisfaction on the performance of the
company specially in the areas of NAM’s business strategy, decisions on mergers and
takeovers, acquisitions and disposals of asses and capital investments. Number of
shareholders strongly suggested to make a balance between shareholding and independent
directors in the company. Thy have advised to appoint more directors from the institutional
shareholders with substantial holdings and shareholders of the company having more than 2%
shareholdings in the company with demonstrated background in industry and business
management.

Requirement:
You are the Deputy Chief Executive of B & B Financials, a fund manager which has a long-term
investment of 5% equity shares in NAM. Your CEO has asked you to prepare a report on the
limitations of depending on independent directors in achieving company objectives and improve
corporate governance, which he would be forwarding to the Chairman of NAM Bangladesh
Limited for consideration.

(b) Textile Landmark (TL Group) incorporated in Bangladesh comprises of 13 companies where
Textile Landmark Ltd. and Textile Landscape Ltd. receive all the orders from buyers and
then get those manufactured by the TL Group entities for maximum capacity utilization. The
Group deals with Tee shirts, polo shirts, trousers etc for male, female and kids in the textile
industry. Your firm has been appointed as the internal auditors to report on monthly basis to
those charged with governance. After carrying out in depth work for the first month your
team identified following weaknesses:-
- Income from wastage sales are not recorded;
- No verification possible regarding contractor bill amounting to BDT 2,115,000 paid to
Ennox Enterprise from Textile Landscape Ltd.;
- Subcontractor rate at Textile Landscape Ltd. was higher than usual where works were
performed without written approval of the TL Group Managing Director; and
- Finance management planning is absent regarding payments made to parties and
maintaining good cash flow.

Requirement:
Prepare a presentation of your observations which should include (a) Fact, (b) Effect, (c) Risk
10
rating, and (d) Recommendation.
 5. Investors, suppliers, employees, the business community, government and the public may rely on
the work of professional accountants in business in the context of preparation and reporting of
financial and other information.
You have been the Chief Financial Officer (CFO) of Dexstar Spinning Mills Limited (Dexstar),
a private limited company, for three years. You are now finalising year-end accounts of Dexstar
for the year ended December 31, 2020.
You have recently been advised by the warehouse manager of a significant level of slow-moving
inventory. The inventory in question is now more than one and half year old and would
normally have been written-down some months ago.
Dexstar shareholders are trying to sell the company, and the managing director (the majority
shareholder) has told you that it is not necessary to write-down the inventory in the year-end
accounts. You are sure that the managing director wants the financial statement to carry an
inflated inventory valuation because he has found a potential buyer. The managing director has
instructed you to finalise the year-end accounts of Dexstar Spinning Mills Limited for the year
ended December 31, 2020 as soon as possible, without writing-down the inventory in question.
Requirement:
Discuss how should you respond to the managing director’s instruction? 7

Answers :
1. (a)
i) Return of Investment (ROI) and Cross Subsidization:
ROI is widely used as a means as a measure to evaluate performance. So, M/s XYZ has rightly
adopted it as a tool to monitor the performance of the company as a whole as well as its divisions.
However, ROI can also be misinterpreted to one’s own interest. The misinterpretation can be in
either of the following forms:

• The returns can be presented with distortions. As profit is usually calculated

after depreciation of fixed assets, depreciation rates can be easily influenced.
• The figures w.r.t. capital employed for investment can also be engineered.
• It is important to note that ROI excludes risk
• ROI ignores business cycle. In the case of the divisions of M/s XYZ, it is possible
that the business cycle of the three divisions could be of different lengths.

Issue with Cross Subsidy: The issue of Cross Subsidy is a rather complex concept. No data are
available regarding allocation of investment funds. If the Head Office allocates them and the
division cannot take their own investment decisions, there is cross-subsidization as it were one-
division’s hard-earned cash is used to buy another division’s assets.

ii) Appropriateness of the use of BCG Market Portfolio Matrix for Divestment Decision:
BCG as a strategy aims at linking the overall growth’ of the market for a product and the growth in
the market share of a product with the product’s cash-generative activities. BCG Matrix classifies
company’s products in terms of potential cash generation and cash expenditure requirements into
cash cows, dogs, stars and question marks. Stars are products with a high share of a growth
market. In the short term, these require capital expenditure, in excess of the cash they generate, in
order to maintain their positions but promise high return in future. In due course, however, stars
become cash cows, which are characterized by a high market share but low sales growth. Cash
cows need very little capital expenditure and generate high level of cash income. Question marks
are products with a high growth market but with a low market share. Dogs are products with a low
share of market growth market. They may be ex-cash cows that have now fallen on hard times.
Dogs should be allowed to die. BCG Matrix may not be suitable for applications to businesses
with divisions as in the case of XYZ Ltd. The problem is that we do not know enough about the
firm’s product range to suggest how the matrix could be applied. It will not be appropriate if the
divisions are slotted in any of the four quadrants of the BCG Matrix. Moreover, BCG Matrix
should not be used in isolation as at times dogs may have a low growth market but can earn
sufficient profits.

(b) Limiting factors and anticipations There are many limiting business factors.

There are some of the organizational and industry factors that are limiting the responsiveness of
managers and their firms to environmental change. Consolidating what is learned from the current
change to help the company improve the change process in the future. To avoid a long and heavy
adaptation process Company must improve its capacity to anticipate and prepare for future change.
The ability to anticipate is the key ingredients of efficient speed and change management.

Business environment and managers Practice

It has shown that managers in many cases fail to anticipate or adequately respond to change for several
reasons. It happens that, managers simply do not notice change in their business environments. As a
result, they are blinded by the changes that have occurred quite unexpectedly. Certain research has
also shown that managers can be aware of changes in their industries, but they may fail to interpret
these changes correctly. They often underestimate the importance of these changes, and they may
wait too
 long to respond, or may not respond at all. Research has also shown that those managers that correctly
notice changes can even correctly interpret the possible impact of these industry changes, but they
might still fail to adopt an appropriate course of action.

Effective action and fast respond

Even when managers are fully aware and recognize the seriousness of the changes that are occurring in
their competitive environments, they may still have difficulties to formulate appropriate responses or
strategies to prevent these threats. A good example how to successfully deal with this problem is
Kodak. Kodak’s leadership equipped themselves with the adequate flexibility needed to respond
quickly to business environmental changes. We have already mentioned the cognitive factors, besides
them there are learning issues. Failures in organizational learning also limit organizational adoption
and ability to change. Here, we examine one of the most important organizational learning issues, the
distinction between lower-level learning and higher-level learning. Lower-level learning is
characterized by improvements or refinements of existing beliefs, understandings, and organizational
processes. Higher- level learning involves developing completely new beliefs, understandings, and
organizational processes. lower - level learning leads to refinements of existing organizational
knowledge and processes that allow firms to reduce unit costs as cumulative output increases.
Problems arise when company managers emphasize lower-level learning at the expense of higher-level
learning. Companies made significant improvement within the activities they are engaged in, but risk
failure to develop new abilities, products, services, and new technologies to compete.

Different approaches and its role

Even when managers are fully aware and recognize the seriousness of the changes that are occurring in
their competitive environments, they may still have difficulties to formulate appropriate responses or
strategies to prevent these threats. A good example how to successfully deal with this problem is
Kodak. Kodak’s leadership equipped themselves with the adequate flexibility needed to respond
quickly to business environmental changes. We have already mentioned the cognitive factors, besides
them there are learning issues. Failures in organizational learning also limit organizational adoption
and ability to change. Here, we examine one of the most important organizational learning issues, the
distinction between lower-level learning and higher-level learning. Lower-level learning is
characterized by improvements or refinements of existing beliefs, understandings, and organizational
processes. Higher- level learning involves developing completely new beliefs, understandings, and
organizational processes. Lower - level learning leads to refinements of existing organizational
knowledge and processes that allow firms to reduce unit costs as cumulative output increases.
Problems arise when company managers emphasize lower-level learning at the expense of higher-level
learning. Companies made significant improvement within the activities they are engaged in, but risk
failure to develop new abilities, products, services, and new technologies to compete.

2. PART-A
(a) Evaluation of Shop@Low’s proposal

Evaluation of the financial impact of price reduction and expected volume increase
Since cost structure in 2021 is expected to remain the same as was in 2020, contribution margin per unit of
sandwich in 2021 based on financial performance in 2020:

Revenue (BDT’000) 54,000

Variable cost (BDT’000) 36,000
Contribution (BDT’000) 18,000
Total sandwiches sold (‘000) in 2020 900
Contribution margin per sandwich (BDT) 20

With the proposed price reduction of BDT 2 per sandwich, contribution margin per sandwich will become
BDT 18 during the period from April 2021 to December 2021.

Three months have already passed in the year 2021. Since weekly sales are consistent over the year and sales
volume in 2021 is not expected to change, provided other things remain the same, from that in 2020, expected
sales volume under the existing contract with Shop@Low in the remaining 9 months of the year 2021 is
675,000 units.
If the proposed reduction in sales price is accepted, operating profit will reduce from lost contribution by
BDT 1,350,000 (=BDT 2 X 675,000).

If sales volume increased by 11.5% as Shop@Low estimated, operating profit will increase from
additional contribution margin by BDT 1,397,250 (=BDT 18X 675,000 X 11.5%).

Comparison of operating profit between 2020 and 2021 considering the new contract terms:
Year 2020 Year 2021
(BDT’000) (BDT’000)

Operating profit without changes in contract with Shop@Low 52,000 52,000

Less. Lost contribution from price reduction - (1,350)
Add. Additional contribution from additional sales volume - 1,397
Operating Profit with changes in contract with Shop @ Los 52,000 52,047

So, if sales volume really increases by 11.5% because of reduction in price, additional sales revenue from
additional volume will compensate for the negative financial impact arising from proposed reduction in
price. This, however, is the case without considering the additional working capital cost that might incur
due to extension of credit period proposed by Shop@Low.

Here it should be noted that accepting the proposed changes in the contract with Shop@Low means that
price reduction becomes certain, but volume increase remains uncertain. If volume increase is less than
11.5%, SB will suffer from a financial loss arising from the new contract terms; though, overall
contribution of the contract with Shop@Low will still remain significant for the business.

(b) Evaluation of the financial impact of extension of credit period from 30 days to 90 days

Current credit period:

Credit period = (Accounts Receivable/Total Credit Sales) X 365 days
Shop@Low = (4,500/54,000) X 365 days = Around 30 days
Other customers = (23,500/188,000) X 365 days = Around 46 days

Extending credit period from 30 days to 90 days will increase account receivable with Shop@Low from
BDT 4.5 million to BDT 13.5 million, without considering the impact of expected volume increase.
Which means, other things remaining the same, working capital will increase by BDT 9 million and
additional interest cost @8% per annum on this additional working capital will be BDT 0.72 million (=
BDT 9 million X 8%).

Apart from this additional financing cost, the extension of credit period will have impact on SB’s liquidity.
As SB’s operating profit is approximately equal to operating cash flows and its operating profit is positive,
it should not have bank overdraft in normal circumstances. With operating cash flow of BDT 4.3 million
(BDT 52 million/12) per month, the target of reducing the bank overdraft to around BDT 2 million by June
2021 is logical and reasonable.

However, with the extension of credit term with Shop@Low and consequent increase in accounts
receivable by BDT 9 million, SB’s target of reducing the overdraft by June 2021 will not be fulfilled, as
shown below:
 All figures are in BDT'000 Apr-21 May-21 Jun-21 Jul-21

Cash inflows:
Revenue-other customers (a) 15,667 15,667 15,667 15,667
Revenue-Show@Low 4,500 - - 4,850 (b)
Total cash inflows 20,167 15,667 15,667 20,517

Cash outflows:
Variable costs-other customers (c ) 7,833 7,833 7,833 7,833
Variable costs-Shop@Low (d) (e ) 3,000 3,345 3,345 3,345
Fixed costs 5,000 5,000 5,000 5,000
Total cash outflows 15,833 16,178 16,178 16,178

Net changes in cash and cash equivalents 4,333 (512) (512) 4,339
Opening cash and cash equivalents -15,000 (10,667) (11,178) (11,690)
Closing cash and cash equivalents (10,667) (11,178) (11,690) (7,351)

(a) Total annual revenue/12 = BDT 188,000,000/12 =BDT 15,667 K

(b) Sales revenue in April 2021 considering the impact of price decrease and volume increase that will be
collected in July 2021:
= BDT 58 X (900,000/12) X 111.5% = BDT 4,850 K

(c) Monthly variable costs for sales to other customers = BDT 94,000,000/12 = BDT 7,833 K
(d) Monthly variable cost for sales to Shop@Low before changes in contract = BDT 36,000,000/12 =
BDT 3,000 K

(e) Monthly variable cost for sales to Shop@Low considering 11.5% increase in volume = BDT 3,000 K
x 111.5% = BDT 3,345 K
[For payment of variable costs and fixed costs, 30 days’ credit term has been considered.]
The above calculation suggests that if Shop@Low’s proposal for credit period extension is accepted,
overdraft at the end of June 2021 will be BDT 11.69 million, well above the target of BDT 2 million.

(c) Potential operating and strategic issues arising from acceptance of Shop@Low’s proposal

Potential pressure from other customers for price reduction

SB is currently selling sandwiches at BDT 60 per sandwich to Shop@Low and at BDT 80 per sandwich to
other customers. If Shop@Low’s proposed price reduction is accepted, the gap between sales price to
other customers and sales price to Show@Low will grow further and other customers may also ask for
price reduction. Cold sandwich market is very competitive and there are many suppliers in this market,
which means that other customers might move to new suppliers if SB does not reduce price for them in
case such a proposal comes. Reduction in price for other customers, if happens, will have significant
negative financial impact for SB.

Production capacity constraint

SB is currently running at around 93% capacity (3.25 million/3.5 million). It has idle capacity only on
Wednesdays and Thursdays. It means that if 11.5% increment in volume occurs evenly across the week,
SB might not be able to meet the demand on four days a week, which, in turn, means that probability of
having negative financial impact from accepting Shop@Low’s proposal is high. SB, probably, can meet
some of the demand on four days (Saturdays, Sundays, Mondays and Tuesdays) by producing additional
sandwich bread on Wednesdays and Thursdays, but that might impact the freshness of cold sandwiches
produced. SB can also increase capacity by running factory on Fridays, but that might lead to higher
factory maintenance and overtime charges.

With additional volume from Shop@Low, capacity utilization will be 95% (3,327,625/3,500,000). If
demand from other customers increases by more than 7% ((3,500,000-3,327,625)/2,350,000), SB will face
a capacity constraint.
 Conclusion on Shop@Low’s proposal
Shop@Low is an important customer for SB generating around 22% of SB’s annual revenue. The
proposed changes most likely will reduce contribution margin from the contract with Shop@Low, but it
will still remain a profitable customer. Given the competitiveness of the industry, it will not be wise to lose
such a big customer to competitors.
Having said that, it is also true that it will not be very easy for Shop@Low to switch to a new supplier. SB
can negotiate with Shop@Low to get some guarantee on expected volume increase. At the same time, SB
should try to reduce its dependency on Shop@Low by finding other customers who might be ready to buy
big volume if price is reduced to some extent. While accepting the proposal of Shop@Low, capacity
constraint and impact on prices of sandwiches sold to other customers should also be considered seriously.

Requirements: PART-B

(a) Long-term business planning

Expected revenue in 2023:

Probability Probability Compound Revenue Volume Price change Revenue
for sales for price probability (BDT’000) in change over over two (BDT’000)
volume 2021 two years years in 2023
0.6 0.7 0.42 242,000 0.992 0.982 95,673
0.4 0.3 0.12 242,000 0.972 0.962 25,182
0.4 0.7 0.28 242,000 0.972 0.982 61,231
0.6 0.3 0.18 242,000 0.992 0.962 39,346
1.00 221,432

Expected total variable costs in 2023 considering volume decrease:

Probability of sales Total variable Impact of volume Impact of price Total variable
volume costs change over two increase over two costs (BDT’000)
(BDT’000) in years years in 2023
2021
0.6 130,000 0.992 1.022 79,536
2
0.4 130,000 0.97 1.022 50,903
130,439

Expected total fixed costs in 2023 = BDT 60,000,000 X (1.05)2 = BDT 66,150,000 Forecast

operating profit or loss for the year ending 31 December 2023:

BDT’000
Revenue 221,432
Less. Total variable costs 130,439
Less. Total fixed costs 66,150
Operating profit 24,843

It appears that if projections come true, operating profit of SB will decrease from BDT 52,000 K to BDT
24,843 K, a 52% drop. It is a substantial decrease. The good news is that the operating profit is still
positive. There are, however, lots of assumptions involved in this calculation and any minor change in any
of these assumptions might change the scenario significantly.

(b) Impact on business sustainability

SB operates in an industry that is highly competitive in nature and such fierce competition can be
explained by the following forces:
 The manufacturing process of cold sandwich is not capital intensive and the portion of fixed cost
in the cost structure is relatively low. As a result, minimum efficient scale (MES) is low, which
explains why there are many players in this industry. With so many suppliers, rivalry among them
is no doubt intense.
  Because of large number of suppliers of cold sandwiches and almost no importance of suppliers’
brands to consumers, retailers can easily switch from one supplier to another. Hence, SB has weak
bargaining power with its customers. The existing difference between sales price to Shop@Low
and sales price to other customers, therefore, does not seem to sustain in the future.
 Like most suppliers of cold sandwiches, SB does not have any control over the prices of raw
materials.
 Cold sandwiches are taken as lunch or light snacks and hence there are many products that
consumers can substitute for cold sandwiches.
None of the forces that define the competitiveness of cold sandwich industry is in favor of SB. Hence, if
SB sticks to its current business strategy, it may experience drop in profitability as has been forecast above
and may also get out of business in the future. SB, therefore, should explore growth opportunities to
sustain and thrive in the future.

SB can think of introducing other cold ready-to-eat foods for superstores and small cafés. It can also think
of selling cold sandwiches to school and college canteens and setting up its own retail outlets in
commercial and office zones.
Moreover, SB should keep preparing rolling forecast reflecting the latest assumptions so that appropriate
actions can be taken before it is too late.

Requirement: PART-C

Financial reporting implications of accounts receivable factoring

According to IFRS 9, transfer of a financial asset leads to derecognition of the asset when the entity
transfers substantially all the risks and rewards of ownership of the financial asset.
Determination of whether the risks and rewards of ownership of a financial asset has been transferred
involves judgments and requires careful evaluation of the terms and conditions associated with the
transfer. Transfer of risks and rewards is evaluated by comparing the entity’s exposure, before and after
the transfer, to variability in the amounts and timing of the net cash flows of the transferred asset.
When an account receivable is transferred without recourse to a debt factor, the debt factor assumes all
risks associated with recoverability of the debt. Which means, if SB transfers its accounts receivable to the
debt factor without recourse, it will get rid of its exposure to credit risk and hence it will no longer be
exposed to the variability in the amounts and timing of the net cash flows of the receivable. Hence, SB will
be able to derecognize the accounts receivable factored in its financial statements and will recognize
financing expense for credit risk insurance premium and interest expense.

May 2021 June 2021 Total

Account receivable (BDT ‘000) 4,500 4,500 9,000
Less. Credit protection insurance premium (1.5%) (BDT 67.5 67.5 135
‘000)
Amount received (BDT’000) 4,432.5 4,432.5 8,865
Interest expense per month (1%) (BDT ‘000) 44.325 44.325 88.65
Total interest expense over three months (BDT’000) 132.975 132.975 265.95

Accounting entries
On derecognition
May 2021 June 2021
BDT’000 BDT’000
Bank Account …Dr 4,432.5 4,432.5
Finance cost … Dr. 67.5 67.5
Accounts Receivable … Cr 4,500 4,500

On recognition and payment of interest expense every month in the next three months
May’ 21 June’ 21 Jul’ 21 Aug’ 21 Sep’ 21 Total
BDT’000 BDT’000 BDT’000 BDT’000 BDT’000 BDT’000
Finance cost …Dr - 44.325 88.65 88.65 44.325 265.95
Bank Account … Cr - 44.325 88.65 88.65 44.325 265.95
 Total cost of factoring accounts receivable of BDT 9 million:
= BDT (135,000 + 265,950)
= BDT 400,950

Recommendations
Cost of financing additional receivable of BDT 9 million by the current overdraft facility is BDT 720,000
whereas cost of factoring the same amount of receivable is BDT 400,950. Factoring the accounts
receivable without recourse, therefore, seems a profitable option.

3. (a)
i) Firms Free Discounted Cash Flow approach (FCFF)

(a) PV of FCFF during explicit forecast period

Taka in million
Year FCFF PV factor (0.12) Total PV

1 18.00 0.893 16.074

2 20.00 0.797 15.940
3 22.50 0.712 16.020
4 28.00 0.636 17.808
5 27.00 0.567 15.309
6 29.50 0.507 14.956
7 30.00 0.452 13.560

Total 109.667

(b) PV of FCFF subsequent to explicit forecast period

CV7 = Taka 3,000,000/0.12 = Taka 250,000,000

PV0 = Taka 250,000,000 X PV factor at 12% for 7th year
= Taka 250,000,000 X 0.452
= Taka 113,000,000

(C) Total PV of FCFF (Taka 109,667,000 + Taka 113,000,000) Taka 222,667,000

Less: External Liabilities including contingent liabilities * Taka 44,500,000
FCFF available to equity holders Taka 178,167,000

MPS (Taka 178,167,000/100,000) Taka 1,781.67

* External Liabilities
Long Term Borrowings Taka 25,000,000
Short Term Borrowings 5,000,000
Trade Payables 9,000,000
Other Current Liabilities
4,500,000
Contingent Liabilities (Claims Tk.600,000+Guarantee Tk.400,000) 1,000,000
Taka 44,500,000
==============

ii) Capitalisation of Earnings Method

Earnings before tax Taka 20,500,000

Less: Extraordinary items Taka 2,000,000
Recurring Expenses Taka 1,000,000 Taka 3,000,000

Expected earnings before tax Taka 17,500,000

 Less: Taxes (@ 35%) Taka 6,125,000

Future sustainable profit after taxes Taka 11,375,000

Value of business (Taka 11,375,000/0.12) Taka 94,791,667

Value of equity (Less external liabilities and contingent liabilities) Taka 50,291,667
(Taka 94,791,667 – Taka 44,550,000)

Price per equity share (Taka 50,291,667/ 100,000) Taka 502.92

ii) Asset based Method

Fixed assets Taka 90,000,000

Inventories 20,000,000
Trade receivables 15,000,000
Cash and Cash equivalent 4,500,000
Goodwill ** 31,330,000
Total Assets Taka 160,830,000
Less: External Liabilities Taka 44,500,000
Net assets at market value Taka 116,330,000
Net assts backing per share (Taka 116,330,000/100,000) Taka 1,163.30

(b)
Fair value calculation:
Method used Value – Taka Weight factor Weighted value–Taka

Free cash flow method 178,167,000 0.50 89,083,500

Capitalisation method 50,291,667 0.20 10,058,333
Net asset based method 116,330,000 0.30 34,899,000
Fair value approach Taka 134,040,833

Conclusion:

It is observed that there was a huge variation of valuations in the values calculated through different
methods.
By using fair value approach (based on weighted average), the impact of variations is minimized.
Payment of Taka 134, 040,833 is recommended to pay to the equity holders of Beyond the Rack, apart
from making payment to external liabilities and contingent liabilities of Taka 44,550,000.
In effect, value of the business of Beyond the Rack is Taka 178,540,833.

4. (a)
The effectiveness of independent directors may be limited by the following factors:

Having the same perspective as shareholding directors

Sound corporate governance stress the importance of independent directors possessing independent
judgement and being appointed by a nomination committee. However, the nomination committee may
restrict its search to directors who will “fit in” with the rest of the board and may be unwilling to
recruit from a diversity of backgrounds.
In addition, may independent directors will only agree to serve on the boards of companies if they
admire the company’s chairman or its way of operating.

Lack of independence
In many companies, independent directors have been appointed through business or social contacts
with directors. It may by difficult to find independent directors who fulfill the independence
requirements of the corporate governance code or freedom from any relationship that compromises
independence.
Lack of business knowledge

This can be the other side of the coin to the problem of lack of independence. Potential independent
directors who have good knowledge of the business and industry may have gained that knowledge
through links with the company in the past.

Lack of human resource management

Limited time may mean that independent directors do not have proper induction into the company, nor
proper updating and refreshment of their skills and knowledge of the company. Their performance may
not be appraised regularly; it should form part of annual appraisal of the board’s activities.

Limited time

The most knowledgeable and effective independent directors are likely to have other significant
demands on their time. As directors, they have to fulfil certain legal requirements. Apart from their
contributions to the main board, they will also probably spend time at meetings of board committees
such as audit, risk management and remuneration committees. The limited involvement resulting from
the lack of time may limit their ability to contribute to board meetings, since they are unbale to obtain a
broad enough picture of what is happening throughout the organisation.

Information available

Independent directors’ contribution will also depend on the information that is readily available to them
as directors. This will be influenced by the quality of the organisation’s information systems, and also
the willingness of shareholding directors to supply information about their activities.

Role of board
The corporate governance code stresses the importance of independent directors being involved in
strategic decisions. If independent directors are involved in formulating strategy, they can fulfil their
key role, that of warning of potential problems and hence, preventing trouble. However, board
meetings may focus almost entirely on current operational matters and short-term operational results.
In addition, at focus board meetings on short-term results may mean that independent directors assess
the performance of the organisation using short-term indicators and its management, and do not focus
on longer-term issues, such as changes in product mix or re-engineering of the organisation’s
processes.
(b)

In preparing of the report some imaginary figures were given to look the report real.

Transmittal Letter:

The Managing Director

Textile Landmark Group
Address
Bangladesh

15 February 2021

Dear Sir,

Draft Internal Auditor’s Report- January 2021

We wish to forward this report to Textile Landmark Group on completion of the internal audit carried out
by us for the period for January 2021.

Our function as the internal auditor was to carry out an independent assessment of the effectiveness of
design and implementation of internal controls and procedures, testing selected transactions for validity,
authorization and recording and report to the management with a feedback on our evaluations and
comments on the internal audit and bring some ideas for the system improvement of the organization.

This work is not primarily directed towards detecting all weaknesses or detection of fraud and should not
therefore be fully relied upon to conclude that no other weaknesses exist. We carried out our internal
audit, according to the audit area coverage agreed earlier with the management and based on records and
information that were requested and provided to us, assuming those to be reliable.

During this review i.e. January-2021, we have covered partial areas of Accounts & Finance, Commercial,
Merchandising, Inventory management (Store) and Procurement departments. In the Summary of the
Observations section of the report, the observations are listed to give an overview of the findings at a
glance. Our monthly report has been provided containing Review Approach, Summary and Details of
Observations, Risk Level (H=High, M=Medium and L=Low), Fact, Effect, Recommendation and
Management Response.

We would like to take this opportunity to thank the management and the staff of Textile Landmark Ltd.
for their courtesy and cooperation extended to us during the course of our work.

Yours faithfully,

Mir Shafiqul Islam, FCA

Partner
1.0 Introduction
Textile Landmark (TL Group) incorporated in Bangladesh comprises of 13 companies where Textile
Landmark Ltd. and Textile Landscape Ltd. receive all the orders from buyers and then get those
manufactured by the TL Group entities for maximum capacity utilization. The Group deals with Tee
shirts, polo shirts, trousers etc for male, female and kids in the textile industry. Our firm has been
appointed as the internal auditors to be reported on monthly basis to those charged with governance.

2.0 Scope of Work

Textile Landmark Ltd. appointed us as the internal auditors for the group. We have commenced
conducting the internal audit in accordance with the requirements of the management of Textile
Landmark Ltd. In planning and performing the internal audit of the management, we have reviewed
and assessed the internal control environment of TL Group in order to determine our extent of work
and auditing procedures for the purpose of developing recommendations for the management and not
for providing assurance on the internal control structure. The management of Textile Landmark Ltd. is
responsible for the compliance of applicable rules, procedures and regulations related to the industry
and local government authorities.

3.0 Summary of Observations

This section gives a brief view of the observations that came to our attention during this audit. The
details of each observation are available in the “Details of the Report” part in 5.0 below this section as
well. Summary of our observations are as follows:

Observations Page #
- Income from wastage sales are not recorded
- No verification possible regarding contractor bill amounting to Tk. 2,115,000 paid
to Ennox Enterprise from Textile Landscape Ltd.
- Subcontractor rate at Textile Landscape Ltd. was higher than usual where work
performed without written approval of MD.
- Finance management planning is absent regarding payments made to parties and
maintaining good cash flow

Indicative Risk Measure Indicator

High Risk:
A very serious issue, it would have a significant impact
Moderate Risk:
A less serious issue, it would have a less serious impact
Low Risk:
A minor issue, it would have a limited impact

4.0 Detailed Observations

The detailed observations part has discussed about observations of individual company and enterprises
discussing chronologically for the identification of the weakness in the control system and
recommendations to address the systems deficiency. For ease of understanding, each observation has
been segmented into four different parts each of which are assigned in a sequential order to reveal into
main findings, namely:

a. Fact (What actually happened);

b. Effect (What harm was caused for not complying with the criteria/standard);
c. Risk Rating (Scale of impact resulting from the occurrence);
d. Recommendation (That addresses the cause and the condition as applicable); and
e. Management Responses (comment of the management on the findings).
Observation # 01

Income from wastage sales are not recorded

Fact

During our review, we have observed that proceeds from wastage sales are not recorded by management
and no trace of such income were found during the preparation of the financial statements of The Fashion
Tomorrow Ltd.

Effect

 Non-operating income of the entity may be understated;

 Wastage level may not be controlled if record of sale of wastage is not thoroughly reviewed by
management; and
 Misuse of company funds may occur due to not keeping proper record of cash inflow from the
sale of wastage.

Risk Rating

High

Recommendation

 Management should ensure proceeds from sale of wastage are recorded through preparation of
vouchers regularly and deposited in company treasury; and
 Income from wastage should be assessed over a certain time period and controls should be
implied to minimize the level of wastage accordingly.

Management Response

Observation # 02

No verification possible regarding contractor bill amounting to Tk. 2,115,000 paid to Ennox
Enterprise from Textile Landscape Ltd.

Fact

During our review, we have observed that contractor bill amounting to Tk. 2,115,000 was paid to Ennox
Enterprise for work performed at Textile Landscape Ltd. without any bill submitted from party. Thus, it
cannot be confirmed whether actual work was performed as per contract with the subcontractor and
payment made accordingly.

Instances are given below:

Expenditure Name of Expenditure Voucher Voucher Amount

SL # Head Party made by # Date (Tk.)
Ennox Name
1 Contractor Bill 11-06 11/01/2021 1,000,000
Enterprise
Ennox Name
2 Contractor Bill 11-07 11/01/2021 1,150,000
Enterprise

Effect
 Payment may be made without authorization from the respective personnel and senior
management; and
 Verification of work performed by subcontractor as per agreement may not be possible.
Risk Rating
High

Recommendation

 Management should ensure all bills are paid through accounts department after authorization
from senior management and respective department in-charge; and
 Invoices received from parties should be verified against terms and conditions previously agreed
before making any payments.

Management Response

Observation # 03
Subcontractor rate at Textile Landscape Ltd. was higher than usual where the work performed
without written approval of MD

Fact

During our review, we have observed that subcontractor rate for making complete garments at Textile
Landscape Ltd. was Tk. 45/piece for Sky (Men’s) Style number – MT256. No written approval of this
rate was found from MD which was higher than the regular subcontractor rates (Tk. 15-20) of TL Group.

Moreover, production department misrepresented approval from MD on the bills submitted from
subcontractors ‘Robiul Enterprise’ and ‘Harun’ to pursue payment amounting to Tk. 1,300,000.

Effect

 Profitability on the order may decrease if subcontractor rates are higher than usual;
 Other subcontractors may also charge higher in the future which increases the manufacturing
cost; and
 Company funds may be misused by paying higher to subcontractors.

Risk Rating

High

Recommendation

 Management should always ensure all rates and bills have written approval of MD before
making payment; and
 Production planning should be done in order to accumulate fixed workers to perform the
production and avoid making use of third-party subcontractors.

Management Response

Observation # 04

Finance management planning is absent regarding payments made to parties and maintaining good
cash flow

Fact
During our review, we have observed that payments to suppliers/parties are made in an unorganized
manner without proper financial management planning to maintain a healthy cashflow of the
organization. Finance and accounts department have a lack of authority in managing the timeliness of
payments made to parties.
 Effect
 The organization may face cashflow problems;
 Some suppliers/parties may be left unpaid for a longer time than others; and
 Negative impact on the supply chain management may occur if parties are not paid with certain
regularity.

Risk Rating
Moderate

Recommendation
 Management should ensure all payments made to parties are through the Accounts Department
considering the future cashflow of the organization; and
 Accounts and Finance department should be given authority in timing the payments of bills to
maintain healthy cashflow of the organization.

Management Response

5.0 Conclusion
We believe that our report will assist the management for improvement of the internal control
system as a step to excel in corporate governance. We would like to thank the staff and management
of TL Group for their cooperation extended to our team during the review and would expect that this
will continue as we move forward with our assignment in future.

5. First, key fundamental principles are relevant in the scenario, need to be considered.

Integrity:
In the light of the available information, it is important to act honestly, and an open and straight forward
approach should be observed.

Objectivity:
Should act without bias, despite the significant threats in the form of self-interest and intimidation.

Professional competence and due care:

Must act diligently. Need to gather sufficient information to be able to determine the appropriate value of
the inventory to be included in the financial statements.
Professional behaviour:
The inventory amount should be accounted for in accordance with relevant account standards. Actions taken
or considered should not discredit the profession in the opinion of informed third party.

Considerations

Identify relevant facts:

Conflicting information have been received from the warehouse manager and the managing director.
The managing director is putting pressure to account for inventory at a higher value than the actual value
of the inventories. The managing director is proposing misrepresenting information about the company in
the financial statements, which would be contrary to the fundamental principle of integrity.

A self-interest threat to the CFO arises from the financial benefit that the CFO is likely to receive if the
company is sold under the proposed deal. The CFO is also feeling intimidated by the managing director.
The managing director appears to be suggesting that the future employment of other employees depends
upon the proposed deal being successful and, therefore, upon the results shown by the financial statements.

Identify affected parties:

Key affected parties are the CFO, the managing director (and other shareholders) and the potential
purchaser of the company. Other employees of the company may also e affected, as it has been implied
that their jobs are at risk if the proposed deal is unsuccessful.

Who should be involved in resolving the issue?

The CFO should involve the warehouse manager, the managing director, and if necessary, the board
members.

Possible course of actions

The CFO cannot simply do what he has been asked to do, because the principle of integrity requires a
professional accountant not to be associated with information that they believe to be false and misleading.
Relaying on the potential buyer’s due diligence to identify the overvaluation is not appropriate. The CFO
is responsible for the honest presentation of the financial statements, and the CFO should not transfer the
responsibility to either the buyer or the auditors.

The first step is to ensure that the CFO has sufficient information. This would include establishing the
basis of valuation of the company’s inventory, investigating the system for counting and evaluating
inventory, and discussing with the warehouse manager the reason why the inventory is slow-moving. The
CFO may also need to discuss the realisable value with someone else, such as the sales director.

Once the CFO is sure of the facts, he should discuss the matter with the managing director. If, in the
CFO’s opinion, the managing director continues to insist on an inflated inventory valuation being
incorporated into the financial statements, the CFO should consider how best to raise the issue with the
other board members of the company. Initially, the CFO could suggest that both the CFO and the
managing director raise the matter with the other board members. If the CFO feel it appropriate to discuss
the matter with anyone else within the company, the CFO must bear in mind the need for appropriate
confidentiality and be clear about CFO’s reasons for raising the matter.

Discussions with the managing director may be made easier by reference the company’s own code of
ethics, if it has one. If it does not, the CFO should make the managing director aware of the ethical
requirements of the CFO’s professional body. The CFO could suggest that the company engages as
independent expert to value the inventory.

At each stage, the CFO should consider the need to follow meetings with email or other written
correspondence to record his points of view. This would be particularly appropriate if the CFO is on the
opinion that the managing director or the board has not been sympathetic to CFO’s concerns.

The CFO might have to consider raising the issue externally, for example altering the auditors to the
existence of the slow-moving inventory or seeking advice from his professional body. If the situation
remains unresolved, the CFO may have to remove himself from the conflict. The clearest way to
disassociate the CFO from misleading financial accounts would be to resign. However, this would only be
an option to be exercised, as a last resort, in the most extreme circumstances.

Resignation alone would not help to resolve the situation. It would be advisable to take legal advice before
considering resignation.

The CFO should document, in detail, the steps that the CFO take in resolving the dilemma in case his
ethical judgement is challenged in the future.

---The End---
CASE STUDY

Suggested Answerers
MARCH-APRIL 2021
Instructions:

1. Check that your question paper contains all the exhibits as mentioned in page 3. The consecutive
page numbering may be found under the base line at the foot of each page.

2. Use the answer script provided by the Institute. Write your name, roll no., registration no. and name
of the subject on the upper portion of the cover page of the answer script.

3. Candidates are asked not to write any particulars of identification in any other place of the answer
script and additional pages if taken.

4. Questions must be answered in English.

5. The answer should be referenced to the relevant workings.

6. Answer script and additional page(s) taken to write answer, used or unused, must not be removed or
taken away from the Examination Hall.

7. You may make assumptions, if necessary, while preparing your answer.

Requirements & Marks Allocation:
You are Shahriar Iqbal, a Senior Manager at Ahmed Rahman & Co., Chartered Accountants. The senior partner of the
firm, Mr. Mohammad Mijanur Rahman FCA has been appointed as the Adviser and Chief Consultant of Tringle
Hospitals Ltd. (THL). He has received an assignment e-mail from Professor Dr. T.I Khan, Chief Executive Officer
(CEO) of THL. Mr. Mohammad Mijanur Rahman FCA has asked you, Shahriar, to prepare a report covering all the
requirements stated in the e-mail of Mr. T.I Khan (Exhibit-1).

Requirements:

You are required to prepare a draft report for your principal Mr. Mohammad Mijanur Rahman FCA. Your report should
comprise the following elements:

 An executive summary;
 Your responses to the detailed requirements (a), (b) and (c) set out in Exhibit-1; and
 State clearly any assumptions that you make.
Marks Allocation:
All of the marks in the Case Study are awarded for the demonstration of professional skills, allocated broadly as
follows:

Requirements Professional Skills Total

Assimilating Structuring Applying Conclusions and Integrative &
and using problems and judgment making multidisciplina
information solutions recommendations - ry skills
Executive Summary 3 5 4 3 - 15
Requirement (a) 7 13 10 9 1 40
Requirement (b) (i) 4 6 6 3 1 20
Requirement (b) (ii) 3 3 2 1 1 10
Requirement (c) 3 3 3 4 2 15
Total 20 30 25 20 5 100

In planning your report, you should be aware that not attempting any one of the requirements, including an executive
summary, will have a significant detrimental effect on your chances of success. In addition, as indicated above, all four-
skill areas will be assessed under each of the four elements of your report.
You should be clear that marks are awarded for demonstrating your professional skills, not for reproducing facts
from the case. In order to be successful, you will need to:
 Demonstrate your knowledge of the case material and make use of your analysis.
 Carry out relevant analysis of the problems and structure your proposed problems and solutions.
 Apply your judgment on the basis of the analysis that you have carried out.
 Draw conclusions from your analysis and judgment, and develop them into practical commercial recommendations.
 Ethical issues may cover, but not limited to, the following topics-
- Lack of professional independence or objectivity;
- Conflict of interest among stakeholders;
- Doubtful accounting or commercial practice or market competition or market proximity;
- Inappropriate pressure to achieve a reported result; and
- Compliance of local laws and regulations;
 Integrative & multidisciplinary skills may cover the following areas-
- Social and economic impacts, e.g. outward remittance for treatment in abroad, wastage of assets, mental
pressure, health hazard, etc., works beyond authority, corruption, human value, embezzlement of fund,
etc.
 LIST OF EXHIBITS

Exhibit Description Page #

1 E-mail from Professor Dr. T.I Khan, Chief Executive Officer of Tringle Hospitals
Ltd. (THL) to Mohammad Mijanur Rahman FCA, Senior Partner of Ahmed Rahman
4-6
& Co., Chartered Accountants dated 20 April 2021. [EXHIBIT-1]
2 Summarized Financial Statements of Tringle Hospitals Ltd. [EXHIBIT-2] 7-8
3 Health Care Services in Bangladesh– Brief notes [EXHIBIT-3] 9
4 Accounting, Audit and Tax issues & litigation [EXHIBIT-4] 10-11

5 Operational issues and other issues [EXHIBIT-5] 12

6 Business Expansion plan and Financing options [EXHIBIT-6] 13-16
7 Social and economic aspects of health care and medical treatment [EXHIBIT-7] 17

8 Extracts from the News Papers on the current Health Care Issues [EXHIBIT-8] 18
 EXHIBIT – 1
E-MAIL
From : Prof. Dr. T.I Khan, Chief Executive Officer, THL
To : Mohammad Mijanur Rahman FCA, Senior Partner
Subject : Appointment as an Adviser
Date : 20 April 2021
Dear Mr. Rahman,
I am pleased to inform you that the Board of Triangle Hospitals Ltd. (THL) appointed you as the adviser of
the hospital. Your areas of works will be: evaluation of financial and operational performances considering
the accounting and other adjustments, evaluation of investment options, risk management, corporate
governance, restructuring, initial public offering (IPO) of shares or issuance of subordinated bond, bank loan,
etc. to finance the expansion plans. You will also be required as an adviser to carry out negotiation on behalf
of the hospital with the Government agencies including Bangladesh Bank, BSEC, DSE, CSE, BIDA, etc. on
the above areas of works. You will use a business card showing you as the Adviser of the hospital.
Your professional fees for the above professional services will be Tk. 2,000,000 (two million) only, which
are contingent on successful completion of IPO. The hospital management expects approval of THL’s IPO at
the highest possible premium, but not less than 40 percent. In case IPO is approved at a premium below 40
percent, your above fees will be reduced by one-fifth for each 10 percent (or part thereof) of such reduction
in premium. In addition, your monthly honorarium will be Tk. 300,000 for next 2 years after completion of
the IPO works, for providing advisory services for achieving business efficiency and implementing corporate
strategic decisions. THL will settle your above professional fees, against an invoice to be raised by your firm
after approval of THL’s IPO. However, as per your request, THL is agreeable to remit the invoiced amount
to your personal bank account without deducting taxes and VAT. The monthly honorarium of Tk. 300,000
will be credited online to your firm’s bank account, as advised by you.

In case the Company decides, as per your advice, to go for subordinated bond or bank loan or a mixture of
the both instead of going for IPO, the above fees for professional services will be reduced from Tk. 2 million
to Tk. 1 million, but the monthly honorarium of Tk. 0.3 million will remain the same for 2 years from 01 July
2022. The payment modalities will be the same as above.

Please find the extracts of financial statements of THL in Exhibit 2 and other relevant information provided
in Exhibit 3 to 8 for your analysis and to draw your conclusions and recommendations for the requirements
stated at the end of this e-mail.

Brief history of company and services rendered

THL was founded in 2010 by Professor T.I Khan, Professor R.I Khan, Prof M.I Khan and Professor Amin
Ahmed, wherein Mr. T.I Khan and Mr. R.I Khan are twins. All are professors of medicine and had worked
previously at Dhaka Medical College & Hospital in Dhaka. Their vision is to have hospitals of international
standards in Bangladesh. Therefore, THL’s message is, “we are committed to clinical excellence and patient
care, which is our driving force in the improvement of human life. This forms a big part of our motivation,
striving to deliver quality, cost-effective healthcare to the people we serve”.
Shareholders and key management issues
The authorized share capital of THL is Tk. 1,000 million and the par share value is Tk. 100. The paid up
capital is Tk. 200 million. The shareholding position as on 30 June 2020 was as follows:
 40 percent of paid up capital owned by Mr. T.I Khan, Chief Executive Officer & Chairman
  60 percent of paid up capital contributed equally by other sponsor directors.
 Non-Executive Directors, Mr. Rasedul Hassan and Mr. Abu Kaiser does not hold any share.
At the beginning of the financial year 2020-21, a Singaporean company, Sunshine (Pte) Ltd. purchased 10
percent shares of THL from Mr. TI Khan. In addition, Mr. Rasedul Hassan purchased 15 percent shares of
the THL from existing directors, namely (i) Prof. M.I Khan (sold 5 percent) (ii) Prof. R.I Khan (sold 5
percent) and (iii) Prof. Amin Ahmed (sold 5 percent). THL Board is currently (as of today) composed of four
sponsor directors, a non-sponsor director, a nominated director and a non-executive director. I am the CEO
and Chairman of the Board of Directors of THL. The non-sponsor and the non-executive director are family
members and close friends of mine, and have no relevant work experience, but they are philanthropists.

It is widely believed that Mr. Rasedul Hassan was patronized by a politically exposed person to buy the
above shares from the directors. Mr. Hassan arranged permission for COVID-19 test at THL, authorizing
THL to issue COVID-19 test certificates to those who are travelling abroad.
Mr. Abu Kaiser possesses Irish citizenship and was appointed as the Executive Director- Operations in
January 2012 with prior permission from BIDA to work full time in THL, as mentioned in the work permit
issued by BIDA. As per THL Board decision, Mr. Kaiser deposited Tk. 10 million, which he had earned
from consultancy services in other local organisations, to the THL’s bank account in 2015-16 to buy shares
of THL. On April 15, 2021 he advised the Finance Manager to remit the equivalent USD of his fund to his
account maintained with a bank in Ireland since he will no longer buy shares of THL.
Organisational set-up and structure
THL has a 400-bed modern hospital in its headquarters building at Dhanmondi in Dhaka, 100-bed modern
hospital at Uttara in Dhaka and also a Diagnostic Centre in Gulshan, Dhaka. The hospital has a total
workforce of 750, of which 20 doctors are specialized professors, 30 doctors are associate consultants and 50
doctors are general physicians and rest are nurses and support staff. The staff are generally well looked after.
However, approximately only 10 percent of the staff have been in the Company for over 10 years. Staff
retention rates are low and most employees are not emotionally engaged according to the employee
satisfaction survey carried out last year.

External Audit and auditors of the company

Your firm, Ahmed Rahman & Co. Chartered Accountants has been auditing THL including its branch and
diagnostic centre for the last 5 years. The statutory audit of THL for the year ended on 30 June 2020 was
signed off by the engagement partner, Mr. Jamil Ahmed FCA, on 10 August 2020 with an unqualified
opinion. The financial statements were approved in the Board meeting dated 10 August 2020, and were
placed and adopted in the Annual General Meeting (AGM) dated 30 September 2020.
The existing audit firm, being eligible to be reappointed for the year 2020-21, expressed its willingness to
serve as the auditor of THL which was approved in the AGM at a fee of Tk. 220,000, 10 percent above the
last year’s audit fees. Accordingly, Ahmed Rahman & Co. has submitted necessary papers to RJSC on 20
October 2020. However, Mr. Rasedul Hassan is keen to change the auditor and appoint M. Huq & Co.
Chartered Accountants since M. Huq & Co. has fame in handling IPO Prospectus and associated papers in
such a way to pass through IPO application at the highest premium. M. Huq & Co. has also good connection
with the Issue Manager in this regard who obtained approval of many IPOs at premium over the last 5 years.
Business expansion and Financing Options
Considering the current demand and supply scenario of health services in Chottogram and its surrounding
districts, there is an enormous potential for developing health services in Chottogram. Accordingly, the
Board of THL, in its meeting dated 10 December 2020, decided to explore the possibility of going for initial
public
offering (IPO) of shares for Tk. 500 million at an expected premium of 40 percent to expand the business
operations by establishing a new 150-bed hospital branch in Chottogram or acquiring Reliable Hospital Ltd.
(details in Exhibit 6) located in the same city. The IPO proceeds are expected to be used for financing
capital investment (to set up a new branch on its own or to settle consideration money for acquisition) Tk.
300 to 500 million, paying-off its current bank loan Tk.95 million, expanding digital platform for
telemedicine, etc., commissioning ERP system in THL for improving operational efficiency and meeting
working capital requirements. The adviser is expected to handle the matter diligently to obtain IPO approval
at a premium of 40 percent per share from BSEC. Alternatively, THL may borrow for longer term by issuing
subordinate bond or obtain Bank loan at available market rate or a mixture of both.
The Company has a plan to apply for IPO sometime between October 2021and January 2022, and start
hospital services in Chottogram either by acquisition of Reliable Hospital Ltd. (RHL) by June 2022 and
starting its operation as a branch of THL from 01 July 2022, or by setting up a new branch there for which
construction will be started in July 2022 and completed by June 2025 and commence operations in another 6
months’ time. Prof. T. I. Khan owns a vacant plot of land of the same size of land owned by RHL which
THL intends to purchase for the construction, should the Company decide not to go for acquisition of RHL.
The plot of land is developed and located in the same locality of RHL and the asking price of the land is Tk.
450 million.
Corporate Social Responsibility
THL runs extensive volunteering works for improvement of health care facilities for the under privileged
people of the country. The hospital has taken the following initiatives during the last 5 years:
 The hospital paid a donation of Tk. 0.15 million per month to a NGO who works for HIV where one
of the directors of THL is a trustee.
 The hospital contributed Tk. 1.0 million each year to the Health Program at Char Area of a district,
from which one of the directors’ hails, for free treatment of the poor people in that locality.
 THL supported the medical expenses of Tk. 5 million for treatment of COVID-19 of under
privileged and poor people at Chottogram since April 2020. The Company is under cost pressure.

You are advised to –

(a) Prepare a draft report, including an executive summary, evaluating the performances of THL
after due consideration of accounting adjustments to the financial statements and relevant
compliance issues, advising the Board on the viability of business expansion plan, and
suggesting the best alternative to finance the said plan.
(b) (i) Critically comment on the strategic planning of THL and evaluate the strengths,
weaknesses, opportunities and threats (SWOT) of THL and based on the SWOT,
recommend to the Board with justification the expansion of THL either by acquisition or
establishing a new branch of hospital.
(ii) You are also requested to advise the Board of THL regarding appointment of M. Huq &
Co. Chartered Accountants instead of Ahmed Rahman & Co. subsequent to the AGM for
the year 2020 at the audit fees approved in the AGM.
(c) Assess the economic and social impact of THL and evaluate the ethical issues involved with
regard to the proposed expansion and doing business in Bangladesh.
I look forward to receiving your draft report on or before 31-May-2021.
Yours sincerely,

T.I Khan
 EXHIBIT- 2

Summarised Financial Statements of Tringle Hospitals Ltd.

 EXHIBIT-
Health Care Services in Bangladesh – Brief notes
Healthcare in Bangladesh
Healthcare in Bangladesh is mainly driven by the public sector. Currently, 34,000 health facilities (66
percent) are owned and run by the government. The private sector is comprised of clinics, hospitals,
diagnostics centres, pharmacies, and multi-specialist hospitals that provide a more premium service
(compared to the public sector facilities) to those who can afford it. Around 3.6 percent of Bangladesh’s GDP
is spent on healthcare, thereby Bangladesh healthcare market is approximately USD14.6 billion. The
government expenditure on health is only about 34 percent of the total health expenditure, the rest (66
percent) being out-of-pocket expenses. Inequity, therefore, is a serious problem affecting the health care
system. Although the health system faces multifaceted challenges such as lack of public health facilities,
scarcity of skilled workforce, inadequate financial resource allocation, Bangladesh has demonstrated much
progress in achieving the health-related Millennium Development Goals (MDGs) especially MDG 4 and
MDG 5.
Opportunities for private participation in healthcare delivery
There are both short-term and long-term opportunities in this market, as more consolidation occurs in the
private healthcare facilities to establish bigger, well-equipped facilities to match the medical demands of
Bangladesh. With rising levels of disposable income among some segments of society, there is a greater
demand for private coverage. Public hospitals are overstretched and under-funded, which drives down
quality and lowers standards. Private hospitals provide patients with a faster, more effective option.
Challenges of Bangladesh’s Health Sector
Bangladesh is still lagging in health care services for the poor as well as the affluent. In recent years, our
neighbors have forged ahead in respect of expertise and experience of doctors, advancement of healthcare
technologies and high quality hospitals and health management organizations. To achieve this in our country,
technological collaboration with technologically advanced hospitals are needed and follow health
management organizations in the developed countries of Asia and the advanced nations of the West.
Medicinal and technological advancement challenges
The practice of medicine and technology has created opportunity and challenges in the way providers
practice medicine today and in the future. Today’s health organizations need low-cost alternatives to provide
out-patient service and in-patient care. Virtual and cyber doctor patient interactions may require to cover all
segments. Telemedicine, the use of electronic communication such as two-way video, phone, email, wireless
tools, and other forms of telecommunications technology may help to achieve the goal.
Doctors and Nurses
Bangladesh is still running a staggering shortage of over 60,000 doctors, and also have a deficit of almost
140,000 nurses. Bangladesh has one of the worst nurse-physician ratios. In Bangladesh, it has only one nurse
per three physicians, while the ratio should have been the other way around, which is three nurses for one
physician. Furthermore, this country has an acute shortage of medical technologists and allied health
professionals and these are physiotherapists, laboratory assistants, x-ray technicians, etc.

Governance, political commitment and leadership

Accountability and transparency is necessary in terms of procurement, supply chain management, logistics so
that well-functioning services can be provided through access of quality medical products and technologies.
A strong health financing structure is also important, which can ensure population’s protection from health
related financial crises. In addition to these aspects, a well-functioning information system is also vital,
which would disseminate information timely on critical health outcomes.
 EXHIBIT-
EMAIL

Dated : 12 April 2021

From : Chairman, Audit Committee, THL
To : Prof Dr. T.I Khan, Chairman THL
Subject : Accounting, Audit and Tax issues and litigations

Dear Mr. Khan,

Mr. Sabbir Hussain, Finance Manager of THL, joined the Company two years ago as per your
recommendation. He monitors the day-to-day operations performed by the accountant and the finance
executives. Month-end journal entries for inventory adjustments, sales incentives, accruals and various other
provisions are approved by Sabbir Hussain. The hospital follows IAS and IFRS in preparing financial
statements. Sabbir Hussain rarely gets any comments/feedback from the Board of Directors on the monthly
accounts. The following issues are placed before the Committee for review:

 The hospital does not deduct any Tax and/or VAT from suppliers, from salaries of employees and when
paying the dividend. Also the hospital did not submit any withholding tax return for deduction. Deputy
Commissioner of Taxes (DCT) disallowed expenses, at the time of assessment of income taxes, as
follows:

Amount in thousand Taka

Reasons for disallowances AY 2017-18 AY 2018-19 AY 2019-20
i) Excess perquisites 6,000 7,000 8,000
ii) Excess expenditure over limit on account of 3,000 2,000 4,000
entertainment and foreign travelling
iii) DCT disallowed 50 percent of the claimed Refer to note #2 to the financial statements,
Promotional expenses Exhibit 2.
iv) Disallowance on account of payments to the 1,000 1,250 1,000
doctors who referred the patients for various
laboratory tests
The Company submitted appeals against the assessment orders for assessment years 2017-18 and 2018-
19, but did not get any remission from Commissioner Appeal and Income Tax Tribunal, against which
appeals are now pending in The High Court. The disputed tax amount are @ 50 percent on the above
disallowances. The Appeal against the assessment order for AY 2019-20 is pending with Commissioner
Appeal. Similar situation may arise for income year 2019-20 also, Return of which is under preparation.
The Company strongly believes that no additional provision for such disallowances were/are required
because it’s lawyer has advocated strongly in The High Court in its favour. The Company did not make
any provision for gratuity; as such no addition was made by DCT. Estimated gratuity obligations to
employees on 30 June 2020 will be Tk. 20 million.
 THL purchased 1 bigha land during the year 2017-18 by paying Tk. 50 million under a Purchase Agreement
with the seller. Accordingly, THL registered the land and has been accounting for it under non-current assets.
The justified reasonable market price of the land is Tk. 10 million. The auditor did not qualify the audit report
related to the year 2017-18. The over-valued balance sheet of THL was used to avail a term loan from XYZ
Bank of Tk. 40 million. THL paid Tk. 50 million and accordingly recognized the same in its books of
accounts, but the seller’s bank statement as well as tax return shows Tk. 10 million. The news media
highlighted a few months back that Chairman of the Board took back Tk. 40 million under hand from the
seller.
 THL makes payment of 30 percent of income of Diagnostic Division of THL to the doctors who refer patients
for various laboratory tests there. Diagnostic Division contributed 30 percent of THL revenue in the last 5
years. THL does not deduct tax at source since it has no service level agreements with the doctors. THL nets
off such 30 percent kick-back payments with the revenue from the Division. The auditor neither qualified the
audit report, nor did they mention the issues under the “Emphasis of Matters” section of their report, since
those charged with governance of the Company did not agree with the auditor for such qualification or
emphasis of matters.
 THL sold one of its hospital buildings along with associated land of 1 acre on 1 July 2019 and leased it
back on the same date, which facilitates the working capital. The carrying amount of the building on 1
July 2019 was Tk. 16 million. The terms of the sale and leaseback were as follows: sale proceeds of
Tk.23.5 million and half-yearly lease rental payments of Tk.1.25 million payable in arrears on 31
December and 30 June over a period of 15 years. The open market value of the property would have been
Tk.20 million, if not leased back on these terms. The lease rental payments were approximately double
the market rate for such a lease. THL has the option to terminate the lease at any time with a month's
notice to the lessor, at which point any excess of the sale proceeds over market value of the property
becomes repayable immediately. THL depreciated the property up to 1 July 2019 and then derecognised
it, recognising a profit of Tk.7.5 million (netted against administrative expenses in the statement of profit
or loss). The first three instalments amounting to Tk.3.75 million, 6 monthly lease rental payments, were
made on 31 December 2019, 30 June 2020 and 31 December 2020. No other accounting entries have
been made. Now THL decides to correctly make the accounting treatment by amortising the excess of the
sale proceeds over market value on a straight line basis over the period the building is expected to be
used for another 15 years from 01 July 2019.
 THL is being sued by a patient in respect of mistreatment based on wrong diagnosis. As a result, the
patient was paralyzed. The customer is suing for Tk. 50 lakh. Court costs are likely to amount to Tk.
100,000. The THL's lawyer has advised that there is an 80 percent chance that the case will be lost and
that the full amount claimed by the customer will become payable against the Company. The Company is
fully insured and the lawyer has advised that the insurance policy covers the event and should be utilized.
Neither any provision nor any disclosure for the same has been made in the financial statements.
 On 01 July 2017, THL invested Tk. 50 million in a convertible bond on its issue date. The bond matures
five years after the issue date and at that date the bond can be converted into ordinary shares of the
investee or repaid at par. The entity's plan for the bond is to hold it until it matures and collect the cash
flows.
 THL has started arranging health and hygiene and safety measures from 01 July 2020, and THL charges
additional Tk.50 every patient for “hygiene and safety charge”. The hospital provides hand sanitizer to
each patient and visitors. The hospital also provides Personal Protection Equipment (PPE) to its staffs.
Average 1,000 patients take the services of the hospital daily. (Assume 365 days a year). THL nets off
such hygiene and safety income with promotional expenses.
 EXHIBIT-
EMAI
Dated : 11 April 2021
From : Director Operations
To : Prof. Dr. T. Khan
Subject : Operational and other Issues

Most of THL’s accounting and administration functions are being performed at its head office in Dhaka.
However, each branch of hospital is responsible for patient admissions and discharges, usage of consumables
and theatre, laboratory and pharmacy operations. As many of these transactions are first recorded on paper-
based source documents, such data have to be captured onto the computer system by employees at the
hospitals. Thereafter all hospital-related transaction data are uploaded in batches to the head office
information system every night. Once uploaded, the data are processed to the company’s computerised
accounting records and used, amongst others, for the billing of patients. THL keeps backup of computerized
data in their central store located at the basement of its headquarters building in Dhaka. From the Minutes of
the December, 2020 Board meeting it is apparent that the Board of Directors of THL is becoming
increasingly anxious about the efficiency and effectiveness of the current information system. The current
system is labour intensive and involves the duplication of processes. ERP system facilitates centralisation of
patient data. It provides real-time and paperless capturing and processing of details relating to patient hospital
stay, dispensing of Hospitals, laboratory investigations, theatre activities and use of surgical supplies. Health
management organisations are demanding more information from hospitals to enable them to manage their
healthcare costs, but with the current information system this cannot be provided as it is not readily available
from the system.
Healthcare service providers must take steps to assess, develop and fine tune key personal and professional
skills to remain proficient. Most training initiatives remain centered around “traditional clinical interview
with its focus on acute illness”, but healthcare providers will be challenged to change that dynamic. The
future will require healthcare leaders to take more of a hands-off approach; involve patients more in personal
care; offer alternatives to current practice and make themselves and staff available to forms of
communicating with the patient without a trip into the office.

Ethical challenges play a vital role to achieve quality services. Recent news stories support this claim with
headlines about ethical violations of healthcare providers- for example, sexual misconduct, rape cases,
expired licenses, fake doctors, unnecessary delays in providing services, keeping patients in ICU for more
days, etc. These incidents hurt the character and trust of the medical service providers. In addition, it creates
legal costs and rise in malpractice insurance coverage for the agency. Giving the very serious ramifications,
healthcare leaders must ensure their behavior and their employees are above reproach.

The doctors of THL and other hospitals receive 25 percent of the Diagnostic Division’s revenue being paid
as referral commission/fees for various blood tests, Scans, MRI, and other tests. Moreover, doctors
sometimes avail complementary foreign tours from the pharmaceutical companies for prescribing their
medicines. THL’s Diagnostic Division contributed 30 percent of revenue shown in the income statements.

THL entered into an agreement with ABC Pharmaceuticals Ltd. to purchase medicines and medical supplies
from them for hospital pharmacy and in patient uses. A professional valuer determines the purchase price of
these medicines and medical supplies. Moreover, THL advises the doctors to prescribe medicines
manufactured by ABC Pharmaceuticals Ltd. and holds inventory accordingly at the hospital pharmacy.
 EXHIBIT-
EMAI
Dated : 20 April 2021
From : Prof. Dr. T.I Khan, Chief Executive Officer
To : Mr. Mohammad Mijanur Rahman FCA
Subject : Business Expansion and financing options

Future Plan
At the Board meeting held on 10 March 2021, the Board has taken business expansion strategy either to
establish a 150-bed facility hospital branch in Chottogram or acquisition of RHL (the only business unit
owned by Reliable Hospital Ltd., a private limited company) in the same city. The capital outlay for the new
branch is estimated Tk. 500 million. However, the acquisition of RHL would be based on net asset valuation
at fair value as per IFRS 13, but THL is not willing to spend over Tk. 500 million unless otherwise justified.
The advisor is expected to set the acquisition price within Tk. 500 million. It was noted that the hospital
branch would require a license from the competent government authority before it can commence operations.
However, RHL’s license needs to be renewed. The chairman of THL has indicated that the new branch of
hospital could leverage off the existing hospital infrastructure.
Acquisition of Reliable Hospital (RHL)
The Board of THL has intended to purchase the 150-bed RHL and price would be fixed as per net asset
valuation (NAV) method at fair value as per IFRS 13. The hospital expects synergy benefits from the
acquisition. THL Board recently announced that the new branch will be used for the treatment of COVID,
Cancer and other patients.
In the case of acquisition, the following key conditions will apply with regard to take over:
 THL will take over the assets (except cash in hand and at bank) and liabilities of RHL at net asset value
as mentioned above without taking any shareholdings in RHL.
 In the event of any liability arising outside the list of liabilities, as mutually agreed by both the parties,
acquired by THL, the same will be settled by the existing shareholders/management of RHL.
 The acquired hospital will be operated as a branch of THL under the name and style of THL.
 The existing shareholders /management of RHL will liquidate their company (RHL) within a period of 6
months from the date of acquisition (amalgamation) by THL.
 The existing shareholders of RHL will not engage directly or indirectly in the hospital business in
Chottogram for a period of 3 years from the date of acquisition by THL.
Forecast of Sales and Operations Costs
With the acquisition of RHL, THL’s revenue will grow by 15 percent in the year 2022-23 and then at the rate
of 10 percent per annum on year-on-year basis from the financial year 2023-24 for subsequent 10 years and 5
percent thereafter. The annual cost of sales is estimated at 55 percent of the revenue. Other costs would be
proportional of revenue for the year 2019-20, as given in Exhibit -2. In the case of own constructed branch,
THL’s revenue, cost of sales and other costs will grow at the same rates and for the relevant duration as
above, but starting from the financial year 2025-26. In addition, there will be an additional financing cost for
Bank loan or subordinate bond or mixture of both in case such bond/loan facilities are availed.
Issues associated with the acquisition
 RHL was blamed for counterfeiting several thousand coronavirus test certificates without testing the
samples. Concerned regulatory authority immediately put a halt on all the functions of the hospital as
various irregularities surfaced during the investigations completed on the hospital recently. The
investigation team found that it forged more than 6,000 COVID-19 certificates, and the top management
embezzled over Tk. 3 crore in the name of providing COVID-19 test services and treatment.
 The team seized many fake COVID-19 certificates, many unauthorised rapid testing kits and an
unregistered jeep.
 It was also observed that RHL sold for Tk. 3,500 a piece of the certificates. Most of the fake certificates
showed ‘negative’ test result.
 The hospital’s license had already expired in 2016 but still they were issued permission for doing
COVID- 19 tests and treating COVID-19 patients.
 The hospital had collected over 10,000 samples and got some 4,200 of them tested from the Institute of
Public Health, the National Institute of Preventive and Social Medicine and the Institute of
Epidemiology, Disease Control and Research.
 The hospital had the tests done free of cost but charged Tk. 3,500 for each certificate. The rest of the
samples remained untested while the RHL management provided fake certificates against those charging
the test seekers the same fee.
 The intensive care unit is in a poor state and there is also no machine in their diagnostic laboratories
while the surgical instruments found at the hospital are outdated.
 The regulatory authority filed a case against the hospital and probable claim and estimated fine could be
Tk. 10 crore along with imprisonment of the existing management of RHL, as may be found guilty.

Moreover, the RHL did not submit any tax return to the concerned tax zone of the hospital for the last 5 years
since it has been sustaining net loss during that period. Ahmed Rahman & Co. Chartered Accountants are
also the statutory auditors of RHL, the engagement partner being Mr. Jamil Ahmed FCA. The audit firm
prepared a valuation report as on 31.3.2021, the relevant extracts of which are as follows:
Book value at cost Fair Value as on
30.6.2020 (audited) 31 March 2021
Particulars Tk.’000 Tk.’000
Hospital Buildings 80,000 90,000
Freehold Land 200,000 380,000
Plant (carrying amount) 488,000 488,000
Inventories 268,000 228,000
Receivables 104,000 94,000
Cash in hand and bank 50,000 50,000
Total Assets 1,190,000 1,330,000
Less: Liabilities
10 % Term Loan (secured on freehold property) 200,000 200,000
Bank overdraft 120,000 120,000
Sundry payables 468,000 450,000
Total liabilities 788,000 770,000
Net Assets 402,000 560,000

As mutually agreed by both the parties, the list of liabilities given in the above table will be taken over by
THL, should the acquisition go ahead. The fair values given in the above table have been determined by the
external auditor who has reported that the fair values have been determined as per IFRS 13.
RHL did not hold Annual General Meeting in the last 2 years, 2019 and 2020. Besides, the hospital has
disputed VAT payable to the Government amounting to Tk. 30 million.
Extra cost for employees
RHL employed 100 people directly. If the amalgamation is executed, they will be paid off with two months’
full salary amounting Tk. 12,000,000 which has not been provided for in the valuation report.
Financing Options
The Board of Directors is ‘open’ in this regard and will accept any of the following financing options, cost of
which is favorable to Company.
Scheme 1: Initial Public Offer (IPO) of shares: The Company expects to raise fund through IPO in mid-
2022 at 40 percent premium. The Company is more experienced now and the Board is
expecting premium of Tk. 4 subject to share valuation either by fixed price method or book
building method and approval of Bangladesh Securities & Exchange Commission (BSEC).
IPO offer price Face value as per BSEC regulation plus 40 percent
premium.
Number of shares to be offered 50,000,000 Ordinary shares.
Face value of each share As per BSEC regulation.
Purpose of raising fund The IPO proceeds are expected to be used to finance
capital investment (to set up a new branch on its own or
to settle consideration money for acquisition) Tk. 300 to
500 million, pay-off its current bank loan Tk. 95
million, expanding digital platform for telemedicine and
virtual consultation, etc., commission ERP system in
THL for improving operational efficiency and
meet working capital requirements.
Date of implementation Within 36 months from receiving the IPO fund.
Scheme 2: Issue of Subordinate Bond: The management of THL consulted the investment plan with the
existing investment banker, underwriters, leasing companies for financing through bond
issue. They argued that BSEC is now encouraging to issue bond instead of 100 percent
equity financing and bond will be cheaper and have a longer repayment period. They have
indicated they can raise the required fund with coupon rate of 8 percent to be paid half-
yearly in 15 years without any moratorium period. However, if the Company faces liquidity
constraints it may withhold repayment of two installments with interest at coupon+1percent.
The Company prefers to consider the default consequences for the decision making.
Scheme 3: Bank Loan: The management consulted with the existing bankers and consultants to get a
term loan of Tk. 50 crore at the interest rate of 9 percent per annum. Repayment of bank
loan has to be made in equal yearly instalments over 10 years, starting after 6 months of
grace period, after the full draw-down of loan amount. However, 2 percent delinquent charge
over 9 percent will have to be paid on the overdue installments, if there is any.

Scheme 4: Combination of Subordinate Bond and Bank Loan: The management may decide to
finance the project through a mixture of Subordinated Bond and Bank Loan, as stated above,
in 50:50 ratio.
Capital Market Scenario 2020
10 companies have collected new equity of Tk. 11.10 billion from the capital market in the year 2020-21 (till
March 31, 2021), which was higher than Tk. 3.33 billion collected by 04 companies in the year 2019-20.
Market risk and expected return
Beta is a measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market
as a whole. Beta is used in the capital asset pricing model (CAPM), a model that calculates the expected rate
of return of an asset based on its beta and expected market returns. The average risk free rate of return is 6
percent. The expected beta (β) for THL is 1.50. The average expected market return from the investments in
similar securities (comprising of dividend and capital gain yield) is 10 percent per annum. (Source: DSE
Market review March 31, 2021).

Market Capitalisation
The market capitalization of all securities listed in DSE Ltd. as on December, 2020 was Tk. 3,124,927
million and market P/E Ratio is 39.26. The Market Capitalization of Service Sector companies to which the
hospital belongs was Tk. 172,236 million and sector’s Price earnings (P/E) ratio was 42.36.

Market Data of Similar Companies

The market price of shares, Earnings per Share (EPS) and Net Asset Value (NAV) per share in DSE were as
follows:

Sl. Company Face NAV Market Price EPS for the

No. Value June, 2020 (Oct. 2020 to March 2021: year ended
(Taka) (Taka) 6-months average) 30 June
(Taka) 2020
a B c d e F
1 Samarita Hospital Ltd. 10 49.23 60.00 0.17
2 Unique Hospital Ltd. 10 93.25 76.50 1.60
3 Kuwait Hospital Ltd. 10 45.85 38.50 1.40
4 Chittagong Hospital Ltd. 10 31.25 35.80 1.75
5 Emirates Hospital Ltd. 10 41.15 37.30 1.90

Companies in serial no. 2-5 above are assumed to be listed in DSE, and their figures given in the above
table are for the purpose of examination only.

Present value factors of Tk. 1 for 17 years are as follows:

Rate Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year 11 Year 12 Year 13 Year 14 Year 15 Year 16 Year 17
5% 0.95 0.90 0.86 0.823 0.78 0.74 0.711 0.677 0.64 0.614 0.585 0.557 0.530 0.505 0.481 0.458 0.436
2 7 4 4 6 5
6% 0.94 0.89 0.84 0.792 0.74 0.70 0.665 0.627 0.59 0.558 0.527 0.497 0.469 0.442 0.417 0.394 0.371
3 0 0 7 5 2
7% 0.93 0.87 0.81 0.763 0.71 0.66 0.623 0.582 0.54 0.508 0.475 0.444 0.415 0.388 0.362 0.339 0.317
5 3 6 3 6 4
8% 0.92 0.85 0.79 0.735 0.68 0.63 0.583 0.540 0.50 0.463 0.429 0.397 0.368 0.340 0.315 0.292 0.270
6 7 4 1 0 0
9% 0.91 0.84 0.77 0.708 0.65 0.59 0.547 0.502 0.46 0.422 0.388 0.356 0.326 0.299 0.275 0.252 0.231
7 2 2 0 6 0
10% 0.90 0.82 0.75 0.683 0.62 0.56 0.513 0.467 0.42 0.386 0.350 0.319 0.290 0.263 0.239 0.218 0.198
9 6 1 1 4 4
11% 0.90 0.81 0.73 0.659 0.59 0.53 0.482 0.434 0.39 0.352 0.317 0.286 0.258 0.232 0.209 0.188 0.170
1 2 1 3 5 1
12% 0.89 0.79 0.71 0.636 0.56 0.50 0.452 0.404 0.36 0.322 0.287 0.257 0.229 0.205 0.183 0.163 0.146
3 7 2 7 7 1
13% 0.88 0.78 0.69 0.613 0.54 0.48 0.425 0.376 0.33 0.295 0.261 0.231 0.204 0.181 0.160 0.141 0.125
5 3 3 3 0 3
14% 0.87 0.76 0.67 0.592 0.51 0.45 0.400 0.351 0.30 0.270 0.237 0.208 0.182 0.160 0.140 0.123 0.108
7 9 5 9 6 8
15% 0.87 0.75 0.65 0.572 0.49 0.43 0.376 0.327 0.28 0.247 0.215 0.187 0.163 0.141 0.123 0.107 0.093
0 6 8 7 2 4
16% 0.86 0.74 0.64 0.552 0.47 0.41 0.354 0.305 0.26 0.227 0.195 0.168 0.145 0.125 0.108 0.093 0.080
2 3 1 6 0 3
17% 0.85 0.73 0.62 0.534 0.45 0.39 0.333 0.285 0.24 0.208 0.178 0.152 0.130 0.111 0.095 0.081 0.069
5 1 4 6 0 3
 EXHIBIT- 7

Social and economic aspects of Health Care and medical treatment

According to a published estimate, around 128,000 Bangladeshis spent more than US$2.0 billion while
seeking treatment in India, Thailand and Singapore in 2012. The number of Bangladeshis going to India with M
(medical) visas soared to more than 221,000 in 2017 which is increasing alarmingly around 20 percent over the
year. Around US$4.0 billion flies out of the country as medical expenses annually screamed the headline of a
report published in one of the Bengali contemporaries late last week. Half of the amount goes to neighbouring
India .

In general, average middle class and above affluent people do not have adequate confidence on the diagnosis
and medical treatment in Bangladesh. They have developed this general feeling from their personal
experiences and other sources. However, in most cases they do not have any choice but to have consultation
with the doctors at the local hospitals and get treatment there. Patient satisfaction is a useful measure for
providing quality indicators in health-care services. Concern over the quality of health-care services in
Bangladesh has resulted in a loss of faith in health-care providers, low use of public health facilities, and
increased outflows of patients from Bangladesh to hospitals abroad. THL is not an exceptional place for the
general patients.

The main barriers to accessing health services are inadequate services and poor quality of existing facilities,
shortage of medicine supplies, busyness of doctors due to high patient load, long travel distance to facilities,
and long waiting times once facilities were reached, very short consultation time, lack of empathy of the
health professionals, their generally callous and casual attitude, aggressive pursuit of monetary gains, poor
levels of competence and occasionally disregard for the sufferings that patients endure without being able to
voice their concerns. All of these service failures are frequently reported in the print and electronic media.
Such failures can play a powerful role in shaping patients’ negative attitudes and dissatisfaction with health-
care service providers and health-care itself.

The overall allocation for health in the financial year 2019-20 budget is 4.9 percent of the total budget.
World Health Organization (WHO) standards is 15 percent of total budget (or five per cent of the GDP).
Furthermore, there is an acute shortage of medical professionals-doctors, nurses and medical staff members.
According to WHO, Bangladesh’s doctor-to-patient ratio is 5.26 per 10,000 people, the second-lowest in
South Asia. Only Bhutan, with a ratio of 3.7 per 10,000 citizens, ranks lower. A leading public health expert
observed that there is a misdistribution of health-sector workers, with 78 percent of Bangladesh’s population
living in rural areas, while 70 percent of doctors are stationed in urban areas.
 EXHIBIT- 8

Extracts from the News Papers on the current Health

Care Issues

Money Laundering through Hospitals?

Many patients prefer treatment outside Bangladesh although the medical expenses are substantially
higher withthe hope to get quality services. Hence money is not a problem for the infected patients,
and they reach hospitalsabroad with the help of THL. They demand uninterrupted reliable quality
medical treatment. In this regard, the patient and the attendant bear costs and send money through the
Bangladeshi living in the treating country in exchange of payment of local currency to their relatives.

Besides, a few Bangladeshi hospitals have a good number of connections with foreign doctors for
critical care patients. Accordingly, THL has the connections with neighboring countries and few
western countries. They generally come on call with significant fees income. On an estimated basis
around USD 50 million per year is passing out for medical treatments abroad through unofficial
channels. Moreover, Hospital doctors are taking training abroad which cost is being managed by
different pharmaceuticals company for which the doctors will prescribe the medicines of their
companies. All cases THL gets patient referral fees from the foreign hospitalsat a rate of 15 percent of
gross bills received from the respective patient which is deposited by them in THL’s USD currency
bank account maintained with a foreign bank abroad called “SBCC”.

The Current Covid-19 Scenario in Bangladesh

Bangladesh has been entangled in fighting COVID-19 for the last 15 months now. As of May 21,
2021, more than 500,000 people are in quarantine and there are 787,726 confirmed cases and
12,310 deaths.
Bangladesh, one of the most densely populated countries of the world, detected the first SARS- CoV-
2 cases on 8 March 2020. Immediately following that, non-pharmaceutical interventions including
school closures, work from home mandate and flight bans were instituted for the following 2
months. After the first peak in July 2020 case numbers reduced, with a slight surge in December
2020. However, starting in early March 2021, case numbers began to rise rapidly, and the
reproduction number is estimated to have doubled from 0.79 on 21 January 2021 to 1.66 on 23
March 2021. The average test positivity rate in the last week of March 2021 was 17 percent country-
wide, when the average number of tests conducted was 26,127 per day. Bangladesh introduced the
ChAdOx1 (Oxford-AstraZeneca) vaccine on 27 January in 2021, and as of 13 April 2021, 5.6 million
people have received the first dose of the vaccine, and 4.1 million people have received the second
dose.

How are Non-COVID Patients Coping?

As a result of multiple hospitals closing down, non-covid patients are being denied regular checkup
and treatment, thus aggravating their condition. Some functioning hospitals are also reluctant to
take in patients fearing that they are contaminated with the virus, as happened to a young
Bangladeshi returneefrom Canada, who died due to gastrointestinal complications after doctors
and nurses were reluctant to treat her fearing that she had COVID-19, especially as she had come
from outside Bangladesh. A number of hospitals have been designated specifically for COVID-19
and to that extent, the pandemic has crowded out services for other non-covid patients in a country
where the healthcare system was already under huge stress even before the pandemic. With many
doctors and nurses also staying away from the hospitals, monitoring medical equipment such as
oxygen tubes and ventilators have become a problem, adversely affecting patients suffering from non-
covid related illnesses. Because of a fear of catching the virus, non- covid patients are also deciding
not to go to the hospitals for appointments.

Draft Report

On

The evaluation of business performance and expansion proposal and

strategic action with prospects and associated issued inclosing
economic,social, and ethical issues involved with Tringle Hospitals Ltd.
(THL)

31 May 2021
Table of Contents

ReferenceContents Page #

01Terms of Reference (TOR)

02Executive Summary
03Responses to Requirement-(a) Assessment of viability of business
expansion plan considering the financial performance and best
financing option for acquisition.

04Responses to Requirement-(b) (i) Evaluation of strategic planning of

the Hospital and SWOT analysis with recommendation to the Board
with justification for acquisition and

(ii) Advice the Board regarding appointment of M Huq & Co.

Chartered Accountant firm.

05Responses to Requirement-(c) Assessment of economic and social

impact and evaluation of ethical issue

06Appendix
 Terms of Reference (TOR)

This report is prepared for the management of Triangle Hospitals Ltd. (THL) based on the information
provided by the management. No attempt has been made to verify the authenticity of the data and
information produced by the management. Necessary adjustments have been made where relevant to
present financial statements fairly and analysis of data for economic decision making purposes.
The report covers the following:

i. Executive Summary
ii. Evaluation of Financial Performance, assessment of viability of business expansion
plan and its financing option.
iii. Evaluation of the strategic planning of the Hospital, SWOT analysis and justification
of the business expansion through either acquisition of Reliable Hospital Ltd. Or
establishing a new branch in Chottogram.
iv. Advice regarding appointment of second auditor, M Huq & Co.
v. Assessment of economic and social impact and evaluation of ethical issues.
This report is prepared solely for the internal uses by the management and the Board of Directorsof THL
Ltd.
 Executive Summery

Triangle Hospitals Ltd. (THL) has been operating with reputation in health care industry of Bangladesh
since its incorporation. It has been experiencing impressive business and financial growth since then except
for the year 2020 due to Covid 19 and other regional chaos. The hospitalmanagement intended to acquire
Reliable Hospitals Ltd. (RHL) or establishment of a new branch in Chottogram as part of its business
expansion project. The financing will be generated either through Initial Public Offer (IPO), or issuance of
subordinate bond or taking bank loan.
Performance Analysis:
We have prepared a revised financial statement of the hospital considering the accounting and tax
adjustments which is attached in Appendix-A. The revised financial statement showed net profit after tax
Tk. 23.5 million for the year 2020-21 and Tk. 42.8 million for the year 2019-20.
The performance of the company based on ratio and trend analysis revealed that the revenue has decreased
by 45% in 2020-21 due to Covid-19 pandemic outbreak from early October 2019.
The gross profit and net profit of the hospital is down by 16.75% and 45% respectively in 2020- 21
because of the higher services and hygiene costs arises from Covid-19 pandemic.
ROCE has also down to 9.1% in 2020-21 as against 18.9% in 2019-20 and ROA is also decreasedto 4.2%
in 2020-21 as against 9.1% in 2019-20.
Current ratio was stable during last two years but Quick ratio soar to 0.59 times in 2020-21 against
0.62 times in 2019-20. The result shows the hospital has enough current assets to meet the
obligations.
The receivable turnover period of the hospital ascended to 76 days in 2020-21 as against 51 daysin 2019-
20. The outgoing ratio indicated poor management of the hospital in terms of working capital
management.

Conclusion & Recommendation:

The financial statements require restatement with unadjusted accounting and taxation issues. Overall
performance of the hospital is great. However, the hospital should comply with the rules and regulations.

Expansion Plan and viability of the acquisition scheme:

We have reviewed the expansion strategy and business plan of the hospital and calculated Net Present
Value (NPV) using discounted cash flow technique. As per calculation, showing in Appendix –B, the
project carries positive NPV of Tk. 592.55 million. The scheme may be viable and business worthy as per
financial analysis is concerned.
However, the hospital has been working on the complaint made by the customers arranging qualityfoods
and secured services, shortage of hospital working capital, holding higher inventory and adequate and
talented tour guides. The sector is enjoying comparative advantages of getting
government support in terms of infrastructure for Islamic Health care and strengthening security of the
tourists to have higher contribution in GDP.
Financing of acquisition scheme and working capital:
EPS and dividend payout ratio of the hospital for last 5 years were very low. Earnings based valuation
technique provides lower value of share. The hospital may not get 50% premium over face value in
offering shares to the public through IPO.
Given the unutilized debt capacity of THL, it is recommended that equity finance should be avoided, and
hospital may go for debt financing with Subordinated bond or bank loan to finance the scheme and
managing required working capital. Since the bank loan is limited to Tk. 30 croreat higher interest rate (9%
per annum plus 5% penal charge on delinquent payment) than Subordinated bond at 8% per annum, the
hospital should choose bond financing to accommodatemerger and working capital of the merged hospital.
Moreover, the regulator, BSEC encourages thehospital for issuing bond.
Viability of expansion plan
The acquisition of Reliable Hospitals Ltd. gives synergy effect of Tk. 181 million [Please refer toAnnexure
-B] to the amalgamated hospital. The hospital should go for the acquisition because of increasing market
share and other following positive impacts:
Revenue synergy- 10 percent revenue will increase because of the general and Covid units to work in the
hospital.
Cost synergy – The overhead costs of the amalgamated hospital will reduce because of the economies of
scale.
Operational efficiency – THL have loyal patients to the doctors and good network with foreign hospitals
particularly in USA and the Middle East whereas Reliable Hospitals Ltd.
SWOT Analysis:
The hospital is currently following product development strategy by innovating new types of services to
offer to the customers in a better and intelligent way. The hospital has taken strategy of merger to count the
myriad threats in the health care industry.
The economic and social environment has become adverse due to impact of COVID 19. However, it is
expected that the hospital can get over it by friendly political environment.
With SWOT analysis, we have identified the strengths, weaknesses, opportunities, and threats of the
hospital. The hospital must build on its strengths, convert weaknesses into opportunities and count the
threats.
 Appointment of M HUQ & & Co. Chartered Accountants as a Second Auditor
The background of appointing M Huq & Co., although existing auditor is appointed in AGM andsubmitted
Form 23B to RJSC, include following factors:

 The hospital expects M Huq & Co. Chartered accountants can manage IPO prospectus to
get approval of IPO application at premium even at lower EPS and dividend pay-out
ratio.
 M Huq & Co. agreed to compromise compliance of reporting issues.
 M Huq & Co. suggests releasing deferred tax liabilities being an expert in taxation services.
The above matters bring threats to the fundamental principles of ethics. Accordingly, the appointment of
M Huq & Co. is illegal being the existing auditor has submitted its acceptance through Form 23B to RJSC
because of the above-mentioned issues.

Economic, Social and Ethical issue:

The hospital paid tax to the government every year. However, it did not submit withholding tax return on
time. The hospital contributed to the GDP growth rate and economic development by employing people
and capital market. The Hospital has been contributing to the charity fund and poor people.

Conclusion & Recommendation:

The Hospital should comply with the ethical issues to uphold the image and reputation of the hospital.
 Detail Report Responses
to Requirements: (a)
We have prepared a revised financial statement, which is attached in ‘Appendix-A’ of this reportwherein
we have considered the adjustments of inadequate tax provisions, prior years’ loss on sale of fixed assets,
capital gain, etc. We have evaluated hospital performances based on ratio analysis and basic trend analysis
comparing that with industry average where applicable.

Business Performance of THL Ltd.:

The revised financial statement shows net profit after tax of Tk. 23.56 million for the year 2020-21
whereas the net profit after tax was Tk. 42.81 million in the year 2018-19.

Revenue:
During the year the hospital revenue fell into Tk. 283.50 million @ 16.75% against the previous year due
to Covid-19 pandemic effects the health care business. The hospital is trying hard to capture global
business/partnering. In this regard the management of the hospital is negotiating with Reliable Hospital
Ltd. for merger. The management is also considering construction of a new hospital building to avoid
reputational issues of RHL.
The diagnostic center made refunds of its test revenue to the doctors.

Profitability:
Gross profit of the hospital has been decreased by 17% against the previous year due to decreaseof sale
and increase of cost of sales of this business
Net profit also decreased during the year by 45% against the previous year due to increase of theoperating
expenses and break down of Covid-19 pandemic.
ROCE of the hospital is also declined to 9.09% in 2020-21 as against 18.95% in 2019-20.ROA
ratio of the hospital is declined to 4.18% in 2020-21 as against 9.07% in 2019-20.
Liquidity:
Current ratio has no change over time for last 2 years and quick ratio has slightly declined duringthe year
to 0.59 times from 0.62 times as against the year 2019-20. It indicates the hospital has limited capacity to
meet the demand of its current obligations.

Efficiency:
Trade receivable turnover period has undermined during the year to 76 days from 51 days in lastyear. The
amount to be received in stuck because of the sluggish economy and lower disposableincome of the
patient. Trade Payable turnover period has no improvement. It shows poor management capacity to
negotiate with the supplier and institutional customers for improving hospital’s working capital and
finance costs.
Inventory holding period is weakening during the year to 74 days from 53 days in previous year.It
indicated management inefficiency in terms of inventory management due to Covid-19 pandemic.
Moreover, the quality of services would be impacted which again could be one of thereasons for further
restructuring.
Investments in fixed assets and human capital has been downsizing in every year which indicatesthat the
hospital has been narrowing its magnificent management efficiency and operational capacity.

Conclusion
The overall performance of the hospital is to be said satisfactory considering the global Covid-19pandemic
situation the hospital performance has fallen during the year.
Recommendation:
We recommend the hospital to diversify services to meet customer demand. To improve profitability, the
hospital has to review its existing strategic plans. System re-engineering of thecollection process and
inventory management should be used to improve efficiency ratios.

Viability of business expansion through acquisition of Reliable Hospital Ltd.

The business expansion through acquisition of Reliable Hospital Ltd. or construction of a hospitalbranch in
Chottogram could be a timely decision to absorb market shares of health services in Chottogram and it
could also a milestone for the people who have been living in Chottogram andits surrounding districts. We
evaluated the acquisition of Reliable Hospital Ltd. using Net Present Value (NPV) method and compared
the result with the net benefits derived from the constructionof hospitals.
The incremental revenue will be 15 percent in the year 2022-23 and then at the rate of 10 percent per
annum on year-on-year basis from the financial year 2023-24 for subsequent 10 years and 5 percent
thereafter. The acquisition of Reliable Hospital Ltd. will provide positive Net Present Value (NPV) of Tk.
575.04 million (Please refer to Annexure-B).
On the other hand, the net present value would be Tk. 592.55 in case of own constructed hospitalbranch in
Chottogram.
The THL should go for the construction of hospital building to avoid the following reputational issues,
which includes issuance of fake COVID-19 certificates and RHL preserved unapproved rapid testing kits
and an unregistered jeep in its custody. RHL preserved unapproved rapid testingkits and an unregistered
jeep. The hospital’s license had already expired in 2016. Outdated machineries are being used in RHL. The
regulatory authority filed a case against the hospital. RHLdid not submit any tax return to the concerned
tax zone of the hospital for the last 5 years.
 Financing options for business expansion
The THL has three financing option which are Initial public offering (IPO), Issuance of
subordinate Bond and Bank Loan.
Initial Public Offer (IPO):
The hospital expects 40 percent premium Tk. 4 over face value of the shares Tk. 10 each whilegoing
initial public offering (IPO) for raising fund of Tk. 500 million. The calculated value per shares of
amalgamated hospital (Appendix-C) could be between Tk. 15 and Tk. 50 per share.
The EPS for last 5 years lies between Tk. 11 to Tk. 21 whereas dividend declared at a rate of 5 percent
which is significantly lower amount in compare with the EPS. It shows that the hospitalis investing profit
without returning back to the family based health service providers. The dividend payout ratio of the
hospital and governance culture indicated that the BSEC may approve IPO application with premium of
Tk. 4 each.
Advantage of IPO includes wider pool of finance, enhance the public reputation and growing
confidence whereas it has Dilution of control, High issue cost, time consuming and strict regulation.
Issue of subordinate Bond:
The hospital may arrange the fund through issuance of subordinated Bond. It is easy to arrangefund and
comparatively cheaper source of finance than equity. It has no dilution impact on EPSand interest is tax
deductible and it increases the growing ratio of the hospital.

Bank loan:
The hospital may raise fund through bank loan which is easy to arrange and cheaper than equityfinance.
In this case no dilution of controls arise in the hospital and bank interest is tax deductible.
Conclusion
The hospital should pursue the project due to imposing the expected growth. IPO is more favor choice
other than Bank loan on issue of subordinate bond.
Recommendation:
We recommend that the hospital should perform for IPO for the raising the fund for acquisition.For IPO
the hospital should maintaining proper bank of accounts and should compliance BESCrule for issuing the
IPO with expected premium.
 Responses to Requirements: (b) (i)

Comment on strategic planning and evaluation of SWOT and Recommendation on the

appointment of second auditor, M Huq & Co. Chartered Accountants

Strategic planning of the business and comments

The hospital has been providing number of screening services to the customers and achieving substantial
growth till the year 2019. Covid-19 pandemic outbreak pulled down the growth of thebusiness and its
performances. However, the opportunity of health care industry in Bangladesh would be gigantic and
hence the hospital will have better business prospects. The hospital has taken some strategic business
decision to bring its business in positive platform which are:

 Purchasing of Reliable Hospital Ltd., a health care hospital.

 Negotiating with the international health care hospital for its patient.
 Referring patients to take superior treatment abroad.
 Keeping hospital firmly & resources healthy at all the time.
 Preserving high quality services. and
 Delivering superior financial performance, etc.
Conclusion
There are both short-term and long-term opportunities in this market, as more consolidation occurs in the
private healthcare facilities to establish bigger, well-equipped facilities to match themedical demands of
Bangladesh. With rising levels of disposable income among some segmentsof society, there is a greater
demand for private coverage. Public hospitals are overstretched and under-funded, which drives down
quality and lowers standards. Government should intervene sharply to mitigate the issues involved in this
sector.

SWOT Analysis and justification of the acquisition of Reliable Hospital Ltd.

We have done the following SWOT analysis:

Strengths
Strengths of the hospital are: The Hospital is well established and operates it business all over the
Bangladesh also worldwide and Bangladesh is unique for its natural resources, it has huge operating
capacity to use this capacity to go for expansion, it has experience resource pool, it has leading brand
reputation, the hospital comply with all rules and regulation, it provides quality of service and maintain
good relationship with the customers.
Weakness

Bangladesh is still lagging in health care services for the poor as well as the affluent. In recentyears, our
neighbors have forged ahead in respect of expertise and experience of doctors,
advancement of healthcare technologies and high-quality hospitals and health management organizations.
Moreover, Bangladesh is still running a staggering shortage of over 60,000 doctorsand have a deficit of
almost 140,000 nurses. Bangladesh has one of the worst nurse-physician ratios. In Bangladesh, it has only
one nurse per three physicians, while the ratio should have beenthe other way around, which is three nurses
for one physician. Furthermore, this country has an acute shortage of medical technologists and allied
health professionals, and these are physiotherapists, laboratory assistants, x-ray technicians, etc.

To achieve this in our country, technological collaboration with technologically advanced hospitals is
needed and follow health management organizations in the developed countries of Asia and the advanced
nations of the West.

Opportunity
The people of the country desire health care service at home. They need quality prescription and medicine
at any cost. Every year more than 3 lakh people are going to abroad for medical treatmentpurposes. These
large number of patients are agreeable to pay more to get quality medical services in the country which
avoids their travel time, visa complexity, foreign exchange savings, money laundering. Moreover, service
sector can improve with higher GDP growth contributing Bangladesh economic development. Moreover,
the hospital can avoid revenue leakages and increase payment of government income tax by stopping
payment of referral fees to the doctors who referred patients for diagnostic testing. Moreover, some
unnecessary test referred by the doctors for generating more referral fees, which could be avoided, and
hence disposable income of the patient remain intact. During COVID 19, we found the issues in healthcare
services and nowthe government is agreeable to establish world class health care hospitals in the country.
The hospitals may use low-cost alternatives to provide out-patient service and in-patient care. Virtual and
cyber doctor patient interactions may require covering all segments. Telemedicine, the use of electronic
communication such as two-way video, phone, email, wireless tools, and other forms of
telecommunication’s technology may help to achieve the goal.

Threats
About 30 percent of revenue of the hospital has been generating from the diagnostic services, which
referral fees are paid to the doctors. The income of the hospital depends on the doctor’s reference to the
patients. The country has no proper healthcare policy. There are significant reputational issues involved
with the acquisition of RHL which includes issuance of fake COVID-
19 certificates and RHL preserved unapproved or unauthorized rapid testing kits and an unregistered jeep
in its custody. RHL preserved unapproved rapid testing kits and an unregisteredjeep. The hospital’s license
had already expired in 2016. Outdated machineries are being used in RHL. The regulatory authority filed a
case against the hospital. The regulatory authority like NBRmay impose penalty being the hospital did not
submit tax return to the concerned tax zone for thelast 5 years.
 Conclusion & Recommendation
Every weakness and threats create an opportunity for rethinking the strategic plan. It is thedemand
of the general people to have quality medical services in the country.
The government participation with the private hospitals will be improved significantly and the
bureaucratic attitude must be avoided soon to improve the health service quality.
Accountability and transparency are necessary in terms of procurement, supply chain management,logistics
so that well-functioning services can be provided through access of quality medical products and
technologies. A strong health financing structure is also important, which can ensurepopulation’s
protection from health-related financial crises. In addition to these aspects, a well- functioning information
system is also vital, which would disseminate information timely on critical health outcomes.
We recommend the hospital to comply with the rules and regulations and tackle the integrity issues as
per code of conduct issued by the regulatory authority. Moreover, regulatory authoritywill be
restructured, and quality officials should be there so that they can think the policy issuesindependently
for the nation.
 Responses to Requirements: (b) (ii)

Appointment of M Huq & Co. as a 2nd auditor subsequent to AGM

Every company should appoint external auditor in accordance with section 210 of Company Act 1994
which is enlisted with FRC under Section 31of Financial Reporting Act 2015. The existing auditor, Ahmed
Rahman & Co., Chartered Accountants has submitted his intents of interest to continue as an auditor of the
hospital, being eligible but Mr. Rashedul Hasan, non-executive director desired to appoint a second
auditor, M Huq & Co., Chartered Accountant, for the same period at same audit fees.
To hospital must comply with the following regulations of the Company Act 1994 for appointment of the
second auditor, after holding of the concerned AGM:

(i) Obtain approval of the board of directors;

(ii) Take consent from the existing auditor;
(iii) Take approval of the shareholders in the EGM
(iv) The hospital to inform the second auditor within 7 days and
(v) Inform the RJSC of such appointment.
The objectives of appointment of a second auditor could be unethical achievement of IPO application and
other subsequent issues.
Conclusion & Recommendation
The Hospital should comply with the above procedures to appoint M. Huq as a second auditor. Appointing
new auditor brings a threat to fundamental principle of ethics. Since the hospital did not comply with the
process laid down in Companies Act 1994, the appointment of M Huq & Co. could be illegal being the
existing auditor had submitted his acceptance of audit to RJSC in Form23B.
 Responses to Requirements: (C)

Assessment of economic and social impact and evaluation of ethical issues

Economic impact
It is widely agreed that Bangladesh healthcare market will boost-up 20% from USD 14.6 billion to USD
17.5 billion provided we ensure quality health care services in Bangladesh. It will increase net income of
the hospital and related tax to the government and increasing disposable income of the patients.
Availability of good medical services in Bangladesh will reduce foreign travel for medical treatment
purposes and unnecessary expenses of foreign currency in abroad. As a result, the GDP of the country will
sharply increase over the year and social development ofthe country will be ensured. The hospital paid
taxes every year and contributed to the growth rateof GDP which turned into economic development.
Social impact
The hospital performs social responsibility by generating new employment, helping deprived people for
improvement of their standard of living. They advise people on health and safety issues and perform
social works. It also donates significantly to the charitable fund and helpingthe poor and underprivileged
people for medical treatment.
It is expected that the amalgamated company, on successful completion of acquisition of RHL or
establishing a new branch in Chottogram, will increase its social works to cover its corporate
responsibilities.

Conclusion & Recommendation

The government expenditure in healthcare must be increased from 34% to at least 51% to ensure
government participation in health care system in Bangladesh. Corporate social responsibility (CSR) is the
continuing commitment by business to behave ethically and contribute to economic development while
improving the quality of life of the workforce and their families as well as of the local community and
society at large.
Ethical issues
The hospital did not deduct tax and VAT while paying professional fees to the advisor. Moreover, the
hospital management expects premium excessively even the hospital’s earnings history does not support to
get it. On the other hand, Mr. Kaiser has been working beyond his work permit, but hospital did not warn
him in this regard. The Finance Manager of the hospital isworking on to transfer illegally earned money to
Kaiser’s personal bank account in Ireland. The BOD might be guilty of money laundering to taking
Kaisers’ illegal money as deposit against shares, now transferring to those money legal to Ireland. Covid
test permission was taken by pushing his political power.
Advisor of the hospital should not accept IPO assignment, which fees are conditional to accomplish
an unethical achievement. Moreover, he cannot take his professional fees in his
personal account escaping firm’s income and related tax. The hospital management followed
inappropriate accounting and commercial practice violating rules and guidelines of applicablelaws and
regulations. It also does not maintain proper books of accounts and tried to appoint second auditor for
ill purposes.
Conclusion & Recommendation
The hospital should comply with the ethical issues which affects the reputation of the hospital. We
recommend that the hospital must comply with the rules and regulations of the country. Aformal audit
committee should form to evaluate integrity issues of the hospital.