How To Write A Comp - MG-Final

PASS |
Professional Accounting
Supplementary School

Professional Accounting Supplementary School (PASS)
How to Write a Comp
2014 UFE Program
PASS |


Agenda
Analysis of the comp and PASS approach

Good Spring Farms Limited
Read and prepare an outline
Walkthrough the case to illustrate the process of preparing an outline
Review sample response

How to write a comp 2
PASS |


Analysis of the comprehensive case
Typical role in case - Business Advisor/controller, but could be combined with
accounting/audit

Typical length of case
1 to 2 pages of introduction
approx 5-8 exhibits
about 12 to 20 pages in length

Will combine a number (at least 4, max 6) of technical competencies
plus pervasive

PASS |


Analysis of the comprehensive case contd
All requireds may be in main body of question which is 1 to 2 pages or most requireds
may be in the exhibits typically approx. 5 to 7 requireds

Since 2003, quants usually appear in at least 1 or 2 primary indicators, while in recent
years, quants appear in 4 5 primary indicators

Required/issues will be intertwined - integration is essential

Ranking is also essential

PASS |


Approach to writing a comp
Step 1: Read main body of question
Write down on outline:
Key factors about the company (extraneous information)
Required
i. All or almost all requireds may be provided in main body of question
ii. Most specific required may be in exhibits
Factors or obj. important to client/risks
Role
Consider types of quants required
What decisions have to be made?

PASS |


Step 1: Read main body of question contd
Write down on exam paper:
Margin notes
Highlight or/and underline key information

Spend approximately 10 - 20 minutes on Step 1

Before beginning Step 2, put each required on a separate outline page.
There may only be one or two broad requireds in the main body to put down.

PASS |


Step 2: Read remainder of case & complete
outline
Qualitative Information

a. Determine if there are further requireds/clarification of required, factors or obj.
important to client, extraneous information

b. Determine which required qualitative information relates to

(i) Insert issues/facts based on qualitative information underneath appropriate
required (in the outline)
(ii) Keep notes in margin

PASS |


outline
Qualitative Information contd
In cases where only one or two broad requireds provided in main body, with most
requireds expected to be in exhibits, may wish to put down anticipated requireds, as
proceeding thru case and complete step 2b for these requireds if you believe that a
required is likely to come up later in case, based on information provided
e.g. upon seeing an accounting issue, anticipate accounting required and note
requireds and issues/facts, even before explicit accounting reqd comes up

Alternatively, only put down requireds when they come up will mean getting thru the
case much quicker and then you will have to go back and fill in requireds (when you get
to step 3a)

PASS |


outline
Qualitative Information contd

c. Keep level of detail minimal

d. Cross reference

e. Note if there are any further decisions to be made based on required/information
provided

PASS |


outline
Quantitative schedules

Determine what quantitative schedules you will perform, based on required, i.e.
NPV
Cash flows
CM etc
PASS |


Step 3: After reading the entire case
a. Determine which issue unused /extraneous information relates to

b. Look at each required and clue in to PASS techniques that would be helpful in
analysis, i.e.
Numerical methods
Financial accounting depth
Assurance

c. Ranking
PASS |


Step 3: After reading the entire case contd
Before ranking consider the following:

i. The information available/work required - both qual and quants

ii. Which competencies are being tested
Even if not asked for directly, consider whether Governance, Strategy and
Risk Management (especially risks and general business issues) and
Taxation is relevant

iii. Whether each indicator (associated with the competency) is primary versus
secondary
PASS |


Step 3: After reading the entire case contd
Rank and allocate time taking into consideration amount of work and whether
competencies are primary versus secondary

d. Integration:
Recognize how requireds/issues are intertwined
Integration / Decision tree

Total approximate time spent planning: 70 - 105 minutes

PASS |


Step 4: Begin writing
Re-read some parts

Do all exhibits first OR Do exhibits as each section gets done

Watch time

Double space

Don't do exhibits in body of case

Keep it simple

PASS |


Step 4: Begin writing contd
Don't re-read the whole case

Watch for late changes

Make sure to conclude - 3 types of conclusions
Within a required / issue (i.e. conclude on a quantitative schedule / conclude on a
qualitative adjustment, issue etc.)
Conclude on the entire required / issue
Overall conclusion (integrates issues, ties requireds / issues together)
Will be critical for pervasive!

PASS |


What to include in the outline
For each required, write down:

Qualitative
Pro / Con points to discuss

Qualitative points/issues you want to
discuss including:
Salient facts
Biases
Objectives
Key success factors etc
Quantitative
Write down what schedule(s)
B/E
Normalized income
Cash Flow
Adjust B/S & I/S to FMV
Valuation etc.

Write down which items to include in
quant schedule
Adjustments
Items to include in cash flows etc
PASS |


What to include in the outline contd
Follow the process for each issue / required

Put one required on each page

Clue in to PASS techniques that would be helpful

PASS |


Common techniques to use in a comp
Evaluation of proposals or/and agreements
Consider all possible advantages and disadvantages (usually qualitative)

May provide information necessary for quants (eg. cash flow, breakeven etc)

Consider risk

Look for definitions

Look for factors not incorporated into agreement

PASS |


Analysis of financial statements
Review both balance sheet and income statement

Before examining specific balances:

Consider bias - Are there over/under aggressive policies or incorrect accounting
treatments which over/understate f/s

Consider limitations of GAAP - even if f/s are in accordance with GAAP - FMV may
be more relevant

Make sure you understand what makes the business profitable

PASS |


Before examining specific balances contd:
Consider impact of related party transactions
measurement may not be accurate;
transaction may not be legitimate - may only be carried out to distort the f/s
Financial statements may require adjustment

Both qualitative discussions and quantitative adjustments should be dealt with
(assuming quantitative information is available)

Analyze financial statements after adjustments

PASS |


Balance sheet

Consider key items:

Focus on large assets:
be explicit, especially if grown
point out the size of the asset in relation to total assets or other assets

PASS |


Balance sheet contd

Cash & cash equivalents - liquidity
If cash decreased - consider why?
Did other assets increase?
If yes, what type of assets?
If no, is cash being used to keep operation going?
Interpret decrease

PASS |


Balance sheet contd

Investments and/or other redundant assets - are they decreasing?
A/R - trend from previous years relative to sales trend
Inventory - trend from previous years relative to sales trend
Soft assets
are they substantial relative to overall b/s?
do they really have value?
consider bias

PASS |


Balance sheet contd

Unusual - non standard asset

New assets not on prior years statement

Assets resulting from related party transactions

Is accounts payable growing - question why - may indicate CF problem

PASS |


Balance sheet contd

Debt - is debt growing and why?
how much is due in short term?
compare repayment requirements with cash flows
also consider whether there are investments or other assets which could easily be
liquidated to generate cash flows

Consider key ratios - debt to equity; working capital; return on assets/investment;
turnovers etc.

PASS |


Income statement
Always normalize by removing non-recurring items

Consider contribution margin, gross margin, net margin etc. - compare with previous
year (or similar company or industry if info available)

Consider trend in bottom line (after normalizing)

Look at component of sales and expenses

Consider seasonality if relevant

PASS |


Final points

Consider possibility of going concern (in conjunction with qualitative information) if
relevant
Historical losses (usually growing)
Little cash
Increasing debt
Poor ratios (especially working capital / debt to equity) etc.

PASS |


Final points contd

Use micro information to interpret F/S
financial information in notes;
financial information on divisional / plant / product line basis;
non-financial information to explain F/S

PASS |


Final points contd

Indicate if you are missing essential information, e.g.
Do you have sufficient information on policies
Missing consolidated F/S/ Missing individual company F/S

In analyzing B/S and I/S, dont look at individual fluctuations in isolation.

Try to see the bigger picture!

PASS |


Quantitative analysis
What you should do
Explain why you are performing the analysis

Make assumptions in performing the calculation / Review client assumptions

Draw conclusions (i.e. Division / product is not profitable)

Analyze the results

Make constructive recommendations based on analysis and conclusion

PASS |


Types of common quantitative techniques
Projected cash flows and cash flow analysis
Discounted cash flows
GAAP adj. to f/s and restatement of f/s - to GAAP or FMV
Ratio analysis
Contribution margin analysis / Gross margin analysis / analysis of divisional F/S
Break-even analysis

PASS |


Types of common quantitative techniques contd

Valuation analysis

Capacity of operations calculations

Other management accounting analysis
absorption costing
incremental costing
direct costing
allocation of costs etc.

PASS |


General points to consider in comps that may
not tie in with individual requireds

Risk analysis
Limitations of analysis
Potential conflict of interest
Key success factors
Big picture issue

Some of the above points will impact the Governance, Strategy and Risk Management
Competency;
Others will impact the Pervasive Competency

PASS |


Good Spring Farms Limited
Good Spring
Farms
Limited
PASS |


Step 1: Read main body of question
Write down on outline:
Key factors about the company (extraneous information)
Required
i. All or almost all requireds may be provided in main body of question
ii. Most specific required may be in exhibits
Factors or obj. important to client/risks
Role
What decisions have to be made?

PASS |

Reqds
Key facts
- Inc. 2 owners
- Sells eggs, meat & by-products
PASS |

Risk
Key facts
- Inc. 2 owners
- Sells eggs, meat & by-products
Reqd
Obj
CF
See if viable
Reqds
- Virus pressure from bank
- GSF in distress
- Risk bookkeeper left
Objectives
Dont want to sell motivated to
keep
- Oct 1, 2014
PASS |


Requireds
1. Should they renew certification with COPA? Or MOO?
COPA premium prices/ COPA first automated tracking
Address certification needs

2. Review F/S never had a review or audit
Might be time to start capitalizing ostriches - Accounting

3. 3 year forecast Forecast & other relevant issues
4. Evidence of organic certification
5. Prepare review engagement planning memo sig areas of risk & procedures
PASS |


Step 1 contd
Role:
CA consulting and review engagement 1
st
time review

3 yr forecast
Adj. F/S maybe re-compute covenants

Decisions
1. COPA vs MOO?
2. Conclude on viability for bank
3. Should they accept loan of $350k from father?
4. Conclude on certification needs
PASS |


Setting up the pages for the outline
PASS |


Setting up pages for the outline contd
PASS |


outline
Qualitative information:
a. Determine if there are further requireds/clarification of required, factors or obj.
important to client, extraneous information
b. Determine which required qualitative information relates to
c. Keep level of detail minimal
d. Cross reference
e. Note if there are any further decisions to be made based on required/information
provided

Quantitative information:
a. Determine what schedules you will perform

PASS |

Possible going concern- re-
compute covenants
If not, GC
PASS |

Finance capacity?- con
Con - must
Forecast
Con
hard to
verify
Same as COPA
Less restrictive
than COPA
Less than COPA, Forecast ?
Review
vs audit
PASS |

Reliable?
Not good
cant integrate
Expensive.
Reliable?
Track
inventory
See if necessary - capacity
PASS |

Integrate -
good
Good - tie to accting
Is this
sufficient?
Easier to
control
inventory
What is installation cost for AIS?
Good
support
PASS |

Forecast
Forecast
Forecast
PASS |

Forecast
Forecast
Forecast
Accounting accrue/Forecast
PASS |

PASS |

PASS |

Allow. rev rec /
Assur. proc
Procedure amortization
Forecast - equipment
PASS |

Acctng debt vs equity
Acctng shd be debt
Forecast
Forecast - 2013
PASS |

Capacity
Amort diff?
Forecast
Forecast
PASS |

Accrue
PASS |


Step 3: After reading the entire case
a. Determine which issue unused /extraneous information relates to

b. Look at each required and clue in to PASS techniques that would be helpful in
analysis

c. Ranking and time allocation

PASS |

Accounting Issues
Clue into:
Financial accounting depth technique
Ostrich comment
Focus on (a) policies and (b) F/S missing inv., cert fees on f/s, 3 yrs given
Try to adjust for as many as possible given time constraint
Re-compute covenant
45 min
PM
PASS |

COPA vs MOO
Clue into:
Do Pro/Con must explain why for each point
Look elsewhere in case for any points
Focus on comparing between 2 options
See if you can do any quants to back up qual
Integrate decision into cash flow
Conclude
45 mins
MDM

PASS |

Review
Clue into:
Review engagement careful on procedures! (not audit!)
Assurance depth lecture
Overview 1
St
time review, risks
Procedures link to accounting issues, How and Why

Conclude whether to accept engagement
30 mins
Assurance
PASS |

3yr Forecast
Clue into:
Do forecast for 3 yrs
Consider capacity constraints
Consider different types of revenues eggs, meat, by-products
Include various expenses operating, financing, investing
Assumptions and conclusions important
Integration with qualitative decisions, i.e. COPA vs MOO/AIS vs MICRO
Conclusions
45 mins
Finance
PASS |

Evidence of Organic Certification
Clue into:
Know alternative reports
Know the details around the different reports, i.e. assurance, purpose of report etc.
Give some procedures
Always discuss limitations (things that are hard or impossible to do)
Recommend
30 mins
Assurance
PASS |


Step 3: After finishing reading comp

1. Go back and fill in any missing pieces of the puzzle (unused information). Also
look back at Step 1 to remind yourself of any key points to pick up

2. Rank requireds and do a time budget (see above)

Above issues - 195 minutes
Reading and planning - 105 minutes

3. Consider which competencies are being tested and what are the Primary
(and Secondary Indicators)

PASS |


Step 3: After finishing reading comp contd

4. Recognize how issues are intertwined (Integration)

Do the decisions that impact the cash flow first:
COPA vs. MOO and the computer systems decision
Integrate the quants into the cash flow

Also integrate accounting issues with the review procedures

PASS |


Step 3: After finishing reading comp contd

5. Consider appropriate techniques from PASS sessions

Analysis of F/S
Financial Actg. Depth
Audit overview (risk) and procedures

6. Ensure that all decisions from Step 1 are answered and the big picture is
looked at

PASS |


Good Spring Farm Ltd.
Review of sample response
PASS |

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PASS |


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