ADVANCED LEVEL EXAMINATION

TUESDAY 19 JULY 2016

(3½ HOURS)

STRATEGIC BUSINESS MANAGEMENT

This paper consists of TWO questions (100 marks).

1. Ensure your candidate details are on the front of your answer booklet. You will be given
time to sign, date and print your name on the answer booklet, and to enter your
candidate number on this question paper. You may not write anything else until the
exam starts.

2. Answer each question in black ball point pen only.

3. Answers to each question must begin on a new page and must be clearly numbered.
Use both sides of the paper in your answer booklet.

4. The examiner will take account of the way in which material is presented.

5. When the assessment is declared closed, you must stop writing immediately. If you
continue to write (even completing your candidate details on a continuation booklet), it
will be classed as misconduct.

The questions in this paper have been prepared on the assumption that candidates do
not have a detailed knowledge of the types of organisations to which they relate. No
additional credit will be given to candidates displaying such knowledge.

IMPORTANT

Question papers contain confidential You MUST enter your candidate number in this box
information and must NOT be removed
from the Examination Hall.

DO NOT TURN OVER UNTIL YOU ARE

INSTRUCTED TO BEGIN WORK

Copyright © ICAEW 2016. All rights reserved. 222382

ICAEW\SBM\J16
QUESTION 1

Kiera Healy Company Ltd (KHC) is a manufacturer of luxury toiletries with a good-quality
brand name, Kiera Healy©. The brand name is reinforced by a distinctive floral design on all
its packaging.

You are Jo Morris, a senior working for Peters, Hurst and Moore LLP (PHM), a firm of ICAEW
Chartered Accountants. KHC is a new client, but not an audit client, of PHM.

When you opened your emails this morning you found the following communication from
Jessica Patel, a manager at PHM.

To: Jo Morris
From: Jessica Patel
Date: 19 July 2016
Subject: KHC - new engagement

PHM has a new engagement to provide advice to KHC and I am the engagement manager. I
would like you to work on this assignment with me.

I met recently with Kiera Healy, the founder and chief executive of KHC, and the other two
members of the KHC board: the finance director, Jeff Nunn; and the treasurer, Rachel Ridd. I
have provided you with background notes (Exhibit 1).

At the meeting, Kiera explained her ambitions for international expansion to the US over the
next few years, but she also has some concerns about the risks that this expansion might
generate.

Kiera gave me a summary of her international expansion strategy (Exhibit 2). Rachel
provided a document which raised some issues about managing the exchange rate risk from
foreign currency operating cash flows over the initial six months of US trading (Exhibit 3). Jeff
has been asked to consider the longer-term risks of the US operations, assuming that a
warehouse is established there. Also, the board is concerned about the financial reporting
issues arising from expansion to the US. Jeff has provided some details about these issues
(Exhibit 4).

Kiera also asked me to meet with Paula Simmons, KHC’s marketing manager. Paula has
some ideas about how the Kiera Healy© brand and distinctive floral design can be used more
effectively to develop the business in the UK. She would like our evaluation of this strategy.
Paula has provided notes on these issues (Exhibit 5).

A potential ethical matter has also arisen, which I would like you to address (Exhibit 6).

Instructions

“KHC needs PHM’s help and has raised a number of issues which they specifically refer to as
‘requests for advice’. I would like you to address these ‘requests for advice’ (see exhibits) on
the following matters:

(1) The two strategic and operating matters raised by Kiera Healy in respect of KHC’s
international expansion (Exhibit 2).

ICAEW\SBM\J16 Page 2 of 18
 (2) Managing foreign currency exchange rate risk from foreign currency operating cash
flows, as set out by the treasurer, Rachel Ridd (Exhibit 3).

(3) Jeff Nunn’s concerns (Exhibit 4) about whether to invest in, and how to raise finance for,
a warehouse distribution centre in the US and the financial reporting issues arising from
KHC’s US expansion and its financing.

(4) Branding and agreed-upon procedures, as outlined by Paula Simmons, the marketing
director (Exhibit 5).

In addition, please set out the potential ethical implications of the matter identified by Jeff and
Rachel (Exhibit 6). Also, explain the actions that should be taken by PHM and by Jeff and
Rachel in response to this matter.

Requirement

Respond to the instructions from the engagement manager, Jessica Patel.

Total: 60 marks

ICAEW\SBM\J16 Page 3 of 18
Exhibit 1: Company background notes – prepared by Jessica Patel

Origins

KHC was founded in 1998 by Kiera Healy. The company grew rapidly as the Kiera Healy©
brand became increasingly well-known and by 2001 KHC products were being sold
throughout the UK.

Products and manufacturing

KHC has a wide product range which includes: shampoos, conditioners, soap, shower gels
and body lotions.

The toiletries are made at a factory in the UK. Good-quality materials are used, but most
costs are fixed.

Distribution and marketing

KHC does not own any retail outlets. It sells and distributes to department stores and to
chains of upmarket toiletry shops. The larger retailers normally only buy KHC products if they
can obtain significant volume discounts. KHC aims to achieve a margin of 40% on its sales to
retailers, but the discounts demanded by larger retailers mean that this has not always been
achieved.

Retailers sell the KHC products at a premium price, with a mark-up which is often in excess
of 50%. As an example, a 250ml container of shower gel sells at a retail price of about £12.

The budgeted pricing and costing for one container of 250ml shower gel is:

£
Variable production cost 0.50
Packaging 1.00
Allocated fixed production cost 3.30
Full production cost 4.80
Margin for KHC 3.20
Price to retailer 8.00
Retailer mark-up 4.00
Typical retail price to consumer 12.00

Kiera has tried to negotiate higher prices with retailers, but this has normally been met with
refusal and even the threat to cease purchasing KHC products.

Frequently, large stores will negotiate lower prices with KHC and thereby reduce KHC’s
margins. For example, for the 250ml shower gel, the price to a large retailer is normally less
than £8.

Financing

Kiera owns the entire ordinary share capital of KHC. The company originally raised a loan to
finance the factory purchase, but this loan has been repaid and now the company is almost
entirely financed by equity. KHC has reinvested operating cash flows to grow the business.

ICAEW\SBM\J16 Page 4 of 18
Kiera wishes to maintain overall control of the company. She told me that she is reluctant to
have other shareholders involved, as this could potentially create conflict if they wanted
changes to the product or the business model.

Kiera is aware that KHC has been cautious and has grown slowly. However, the KHC board
now wants to expand internationally and finance is therefore required. Kiera cannot afford to
invest any more equity finance in KHC.

Extracts from the financial statements for the year ended 30 June 2016

£’000
Revenue 16,400
Gross profit 6,200
Operating profit 650
Net cash flow from operations 1,380
Property, plant and equipment 2,420
Net assets 5,800

Working capital at 30 June 2016

£’000
Inventories 3,100
Receivables 2,200
Cash 680
Current liabilities 2,600

ICAEW\SBM\J16 Page 5 of 18
Exhibit 2: Summary of international expansion strategy and operations – prepared by
Kiera Healy

Further expansion of our toiletry sales in the UK market has become difficult as most retailers
wishing to sell our products already do so. Also, the UK market is very competitive and it is
becoming increasingly difficult to negotiate price increases with retailers. There is significant
pressure on industry margins in the UK.

While the Kiera Healy© brand is well known in the UK, this is not the case elsewhere. As a
result, we have not yet exported our products.

However, in early 2016, KHC performed some test marketing in the US on a small scale by
selling a range of toiletries to a few retailers in New York and Boston. We tried two different
pricing strategies. In New York we attempted to penetrate the market by entering with a low
price, which was around full cost. In Boston, we positioned the products as a premium brand
and priced them at about 25% more than UK prices. To our surprise, the sales volumes in
Boston were far greater than those in New York.

Although this was only small-scale market testing, we have been sufficiently encouraged to
make the decision to enter the US market from 1 January 2017.

We do not intend to manufacture in the US. For the initial six months trading to 30 June 2017,
KHC will supply each US retailer directly from the existing UK factory. From 1 July 2017,
however, the KHC board is considering two alternative ways of distributing to US retail
customers:

 continue to supply each individual US retailer directly from the existing UK factory; or

 set up a warehouse distribution centre in the US to hold inventory and distribute

throughout the US the products manufactured in the UK factory.

We do not intend to set up a separate US subsidiary, but there will be a US division which will
be part of KHC and controlled from the UK.

Also, KHC needs to get its pricing strategy right. At the moment the Kiera Healy© brand is not
well known in the US, so few people are aware that there is a price difference between
Boston and New York. As we grow, we will need an agreed and consistent pricing strategy
for the US.

Request for advice

I would like PHM to:

(1) evaluate, without calculations, the strategic and operating issues that arise from each of
the following alternatives from 1 July 2017: (a), continue supplying individual US
retailers directly from the existing UK factory; and (b) set up a warehouse distribution
centre in the US. Provide a reasoned recommendation.

(2) explain possible strategies for determining appropriate selling prices in the US market.
Provide a reasoned recommendation.

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Exhibit 3: Managing exchange rate risk from foreign currency operating cash flows
prepared by Rachel Ridd

The board has asked me to consider foreign currency risks relevant to KHC’s first six months
of US operations. I have set out specific illustrative information below.

US operating cash flows – information to illustrate exchange rate risk

KHC will commence operations in the US on 1 January 2017. KHC wishes to hedge its
foreign currency exposure on operating cash flows from that date until 30 June 2017.

On 31 March 2017, KHC will make a payment in sterling of £435,000 for the set-up and
initial manufacturing costs incurred from 1 January 2017. Other cash flows to 30 June 2017
will be in $.

The following are KHC’s operating cash flow forecasts for its US activities (assuming that it
does not set up a warehouse distribution centre in the US during the first six months of
operations):

Cash outflows on 31 March 2017 £(435,000)

Cash inflows on 31 March 2017 $640,000

Cash outflows on 30 June 2017 $(720,000)

Cash inflows on 30 June 2017 $400,000

Forecast exchange rates at 1 January 2017 (London forward foreign exchange market)

Spot ($/£) 1.5240 – 1.5275

3-months forward 0.72 – 0.67 cents premium
6-months forward 1.28 – 1.22 cents premium

Annual interest rates: (for 3-month or 6-month transactions)

Borrowing Lending
Sterling (£) 6.5% 4.5%
US Dollars ($) 5.0% 3.0%

Request for advice

I would like PHM to:

(1) explain the currency risks arising from the US operating cash flows for the six months to
30 June 2017 and evaluate, without calculations, how those risks can be mitigated.

(2) prepare calculations and explanations, using the illustrative information above, showing
the net sterling receipts and payments for KHC for both its 3-month and 6-month
transactions if it hedges using:
 the London forward foreign exchange market
 the money market.

ICAEW\SBM\J16 Page 7 of 18
Exhibit 4: The risks of setting up a US warehouse distribution centre and financial
reporting issues – prepared by Jeff Nunn

I have the following areas of concern about risks if the board decides to set up a warehouse
distribution centre in the US:

 Operating returns and risks

 Raising finance

I am also concerned about the financial reporting implications of the US expansion and its
financing.

Operating returns and risks

If the board decides to invest in a warehouse distribution centre in the US, it is expected that
the purchase would take place on 1 July 2017 and would cost $3 million.

While the KHC board hopes for growth, two alternative outcomes have been identified if a
warehouse distribution centre is opened in the US:

 KHC products will have a niche position in the US market, in which case zero growth is
expected and the net cash inflows in $ will be $400,000 in the year to 30 June 2018. In
addition, cash outflows, incurred in £, will be £100,000 in the same period. These $ and
£ cash flows will be the same amount each year thereafter indefinitely.

 KHC products will have a wider market in the US, in which case the net cash inflows in
$ will be $350,000 in the year to 30 June 2018. In addition, cash outflows, incurred in £,
will be £100,000 in the same period. These $ and £ cash flows would grow at 4% per
annum thereafter indefinitely.

I have made the following working assumptions:

 Operating cash flows will occur at year ends

 The weighted average cost of capital is 10% per annum
 The probability of KHC products having a niche market is 40% and the probability of
KHC products having a wider market is 60%
 The exchange rate at 1 July 2017 will be £1 = $1.5
 Thereafter the $ will appreciate against the £ by 1% per annum indefinitely
 The evaluation is to be in £ sterling

Raising finance

I have no previous experience of raising finance for international ventures, but I am keen to
use the best method of financing in order to reduce risks.

It has been made clear that there is no equity funding available. The additional funding
requirement for a US warehouse would amount to the equivalent of $3 million.

ICAEW\SBM\J16 Page 8 of 18
Financial reporting issues

I would like advice about the key financial reporting issues which would arise from KHC’s US
expansion strategy and its financing. The impact on the financial statements is a matter of
concern to the board.

Request for advice

I would like PHM to:

(1) Recommend, with supporting calculations and explanations, whether KHC should
invest in a warehouse distribution centre in the US. Use the information provided,
including the working assumptions.

(2) Advise on the best method of finance for the US warehouse distribution centre in order
to mitigate risks.

(3) Set out the key financial reporting issues which would arise from KHC’s US expansion
strategy, assuming that KHC invests in a warehouse distribution centre. Include the
financial reporting treatment of your recommended method of finance.

ICAEW\SBM\J16 Page 9 of 18
Exhibit 5: Developing the Kiera Healy© brand – prepared by Paula Simmons

The history of the Kiera Healy© brand in the UK

The Kiera Healy© brand has been supported by national advertising and is well recognised
throughout the UK. Consumer surveys show that the Kiera Healy© brand is fashionable and
is regarded as a luxury brand, particularly by women in the UK aged 25 to 40.

The KHC board is satisfied, based on market research, that compared with similar toiletry
products whose brand is unknown or little known, sales volumes are significantly higher for
KHC products as a result of its brand name.

Specifically, when comparing a Kiera Healy© product with an equivalently priced unbranded
product, it is estimated that the unbranded product would generate 60% less sales volume
than the Kiera Healy© product.

KHC has spent significant amounts in recent years on advertising and brand development. It
is estimated that a competitor wishing to establish a similar brand from a zero base would
require ongoing advertising expenditure of about £450,000 per year, with a present value of
£3.5 million.

In 2014, a large international fashion house, Buckingham plc, offered to purchase the Kiera
Healy© brand in order to use it for its clothing and handbag ranges. It offered KHC
£2.5 million to purchase the Kiera Healy© brand, on the basis that it would grant KHC an
exclusive and permanent right to continue to use, without charge, the Kiera Healy© brand
name for toiletries in the UK. This offer was rejected by the KHC board.

Developing the brand

The KHC board believes that the Kiera Healy© brand is the most important asset owned by
the company. It also considers that KHC is not taking full advantage of the increasing
popularity of the brand.

I recently presented a new branding strategy to the KHC board. This comprises two
alternative proposals, being either: (a) to license the brand; or (b) to sell the brand (see
below). The board has requested that PHM review and evaluate these proposals.

The basis of the new strategy is to leverage the brand and the distinctive floral design that
goes with it. KHC owns the legal property rights to the brand and the floral design.

My proposals

My first proposal is to license the brand. This idea came from a recent approach to KHC by a
manufacturer of handbags, Mooton plc. Mooton would like to rebrand its ‘Attitude’ range of
handbags with the Kiera Healy© brand name and distinctive floral design in order to increase
its sales volumes.

The potential arrangement is that a four-year licensing agreement would be agreed, whereby
Mooton would pay a licensing fee of £5 per Kiera Healy© branded handbag sold. The
‘Attitude’ handbags currently sell at an average price of £150 each and it is not proposed to
change this price. Sales of the ‘Attitude’ range are currently 13,500 handbags per year and
this is expected to increase to 30,000 handbags if they are rebranded as Kiera Healy©.

ICAEW\SBM\J16 Page 10 of 18
The marketing team believes that the Kiera Healy© brand and design could also be licensed
to companies in different industries selling other products such as clothing, accessories and
mobile phone cases.

I have concerns about how KHC would monitor licensee partners in order to ensure their
compliance with the terms of any licensing agreement. I understand that PHM could perform
agreed-upon procedures to assist us in this respect.

My second proposal, as an alternative to licensing, is to sell the Kiera Healy© brand to

another company, but retain an exclusive and permanent right to continue to use, without
charge, the Kiera Healy© brand for toiletries globally.

Request for advice

I would like PHM to:

(1) Explain the factors that KHC should consider in deciding whether to:

 license the Kiera Healy© brand to Mooton and to companies in other industries.
Evaluate the factors to consider in agreeing a licensing fee with Mooton; or

 sell the Kiera Healy© brand to another company, but retain an exclusive and
permanent right to continue to use, without charge, the Kiera Healy© brand for
toiletries globally. Please estimate the minimum price that would be acceptable to
KHC.

(2) Explain the benefits to KHC of PHM carrying out an agreed-upon procedures
assignment to monitor licensee partners such as Mooton. Briefly explain the procedures
that would be performed by PHM during such an assignment.

ICAEW\SBM\J16 Page 11 of 18
Exhibit 6: Potential ethical matter – prepared by Jessica Patel

At the end of my meeting with the KHC board, Kiera had to leave to attend another meeting
and I was able to chat informally to Rachel and Jeff.

Jeff and Rachel told me, in confidence, that in April 2014 they had both become unhappy
with one of KHC’s suppliers, Juno Ltd. They both believed that Juno products had declined in
quality. However, when they informally suggested to Kiera that KHC should change to an
alternative supplier, she refused, but gave no reasons.

In May 2015, Juno notified KHC that it intended to increase its prices by 10%. Jeff and
Rachel again spoke to Kiera suggesting a change of suppliers, but formally this time at a
board meeting. Kiera refused to have the matter discussed and she approved the 10% price
increase.

Last month, Kiera’s personal assistant told Jeff, in confidence, that Kiera’s nephew is the
sales manager for Juno.

Jeff and Rachel, who are both ICAEW Chartered Accountants, thought that I should know
about the situation, but they were unsure what action to take.

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QUESTION 2

“When I took on the role of chairman I did not expect to find such poor information systems
and inadequate management controls. Governance at all levels is questionable.” Mike
Fisher, the new chairman of Quinter plc, was opening a meeting with Rush & Woodrow LLP
(RW), a firm of ICAEW Chartered Accountants.

Quinter sells imported electrical goods to individual customers and to electrical stores. All
sales are made online. Quinter is planning to list on the AIM market before 2020.

You are a senior working for RW, which acts as business advisers to Quinter. RW does not
audit Quinter. The RW engagement manager, Tara Thierens, attended the meeting with Mike
Fisher.

The meeting

Mike continued the meeting after his opening remarks: “I realise that you are new to Quinter,
so I have provided some notes to explain the company background (Exhibit 1) and its
governance and reporting (Exhibit 2).

“Following the recent acquisition of Quinter’s entire ordinary share capital by a private equity
firm, First Money Kapital (FMK), I was appointed as chairman three months ago to help plan
Quinter’s AIM listing before 2020. It has become clear to me that there are a lot of issues to
resolve. The board has authorised me to take advice from RW.

“I have provided some financial and operating data, prepared by Quinter’s finance director
(Exhibit 3). I would like you to analyse quarterly performance and identify any areas of
operational weakness.

“I do not consider that the data is sufficient to enable the board to manage and operate the
business effectively. My concerns about data management, on which I would like RW’s
advice, relate to: firstly, sales and customer data; and secondly, inventory data. I have set out
my views on these matters (Exhibit 4).

“Another issue is that Quinter has no policy on sustainability. This will become more of an
issue in the period prior to the AIM listing and the company’s corporate responsibility is
already being questioned by stakeholders. I think we can use the annual report to publicise
our sustainability policy as part of integrated reporting. I have provided some notes
(Exhibit 5).

“I appreciate that information is limited at present, but I have provided terms of reference for
an engagement, where I set out more precisely what is required from RW (Exhibit 6).”

Instructions

After the meeting, Tara asks to see you. She outlines what occurred during her meeting with
Mike and gives you the following instructions:

“I would like you to provide, for my consideration, a draft response to the terms of reference
(Exhibit 6) from Mike Fisher, the Quinter chairman.”

Requirement

Respond to the instructions from the RW engagement manager, Tara.

Total: 40 marks

ICAEW\SBM\J16 Page 13 of 18
Exhibit 1: Company background – prepared by Mike Fisher

Products

Quinter sells two types of electrical products: items for the home (for example: fridges,
cookers, irons, kettles, computer equipment); and items for the garden (for example:
lawnmowers and electrical garden tools).

The products carry manufacturers’ brand names, but these tend not to be well-known.
Quinter describes them as the ‘brands of the future’.

Suppliers

The Quinter business model is to import basic-quality, low-cost electrical goods from
developing countries. The goods are safe and function adequately, but the technical features
are approximately four to five years behind the market-leading brands.

Quinter obtains volume discounts from suppliers by placing large orders. Each order has a
separate contract. Every contract has a clause which specifies that there should be no more
than three faulty items per 100 items purchased. Suppliers can be replaced if they do not
meet Quinter’s price and quality requirements.

Inventories

Quinter holds significant amounts of inventories. The reasons given by the procurement staff
when questioned about this are:
 Lead times from suppliers can be long and uncertain
 Demand can be variable
 There are many different product lines

Sales and customers

All customers order online. There are two types of customers:

 Individual customers
 Stores selling electrical goods

The prices that stores pay are 10% lower than the prices paid by individual customers, but
stores are required to make an order with a minimum value of £1,000. Stores use a separate
website from individual customers. There are many stores on Quinter’s customer database
and these tend to be small businesses with limited resources.

To place an order, individual customers are asked to provide details about themselves
(name, address, gender, age, occupation, interests, family information). This information is
held on a database along with the history of transactions with Quinter. Little use appears to
be made of this database by Quinter staff. One comment by a staff member was that “there is
too much detailed data to be useful to us. In the past five years over one million customers
have bought products from us.”

Both stores and individual customers have the right to return goods to Quinter, for whatever
reason, within 14 days of purchase. If the goods are faulty, they can be returned to Quinter
within one year of purchase.

ICAEW\SBM\J16 Page 14 of 18
Exhibit 2: Governance and reporting – prepared by Mike Fisher

Governance

The board consists of four executive directors who have each held these posts for over 10
years. Before I was appointed, the chief executive also acted as chairman.

At board level, all major functions are carried out by the main board (ie there are no
subcommittees of the board, such as an audit committee, nominations committee or
remuneration committee).

There is no internal audit department.

All Quinter’s ordinary shares are held by the private equity firm, FMK.

The remuneration of directors has increased by an average of 10% per annum over the past
five years. Over the same period, profits have not grown.

Reporting

The board receives quarterly, summary management accounts and operating data to monitor
the performance of the business. These are similar, in terms of the level of detail, to that
provided in Exhibit 3.

ICAEW\SBM\J16 Page 15 of 18
Exhibit 3: Financial and operating data – prepared by Quinter’s finance director

Quarterly summary management accounts of Quinter for the year ended 30 June 2016

3 months to 3 months to 3 months to 3 months to TOTAL

30 September 31 December 31 March 30 June
2015 2015 2016 2016

£’000 £’000 £’000 £’000 £’000

Revenue by customer type:

Individual
customers 4,805 3,914 4,766 6,975 20,460
Stores 1,395 1,136 1,384 2,025 5,940
Revenue by product type:

Home products 4,200 4,550 4,900 5,250 18,900

Garden products 2,000 500 1,250 3,750 7,500

Cost of sales by product type:

Home products 2,940 3,185 3,430 3,675 13,230

Garden products 1,200 300 750 2,250 4,500

Operating data for Quinter for the year ended 30 June 2016

3 months to 3 months to 3 months to 3 months to TOTAL

30 September 31 December 31 March 30 June
2015 2015 2016 2016

Number of items sold:

Home products 120,000 130,000 140,000 150,000 540,000

Garden products 50,000 10,000 25,000 75,000 160,000

Number of items
returned by all
customers 8,500 7,000 8,250 11,250 35,000

Number of
different types of
product sold 480 380 420 560 –

ICAEW\SBM\J16 Page 16 of 18
Exhibit 4: Data management – prepared by Mike Fisher

In my view, whilst Quinter captures data, it does not analyse and disseminate data as
efficiently and effectively as it should in order to manage and control the business.

Sales and customer data

Data being captured needs more detailed analysis for effective board-level decision making.
(Exhibit 3 represents the level of detail available to the board).

For example, we do not know enough about our customers to market to the needs of each
sub-group. Also, we do not know how much profit each individual product is making and
therefore whether it is worth selling.

Inventory data

We are holding too much inventory. I understand that we need to hold enough to meet
customer needs quickly, but with better information we could lower overall inventory levels
and therefore lower inventory holding costs.

I am also concerned that we may not be valuing inventories correctly for financial reporting
purposes, particularly as there is a large amount of inventories purchased in a variety of
foreign currencies.

Exhibit 5: Sustainability and integrated reporting – prepared by Mike Fisher

I would like Quinter to introduce a new policy called “return and recycle”.

This policy goes beyond what is required by environmental regulations. It involves customers
informing us that they intend to dispose of one of our products which they purchased in the
past. We will offer to organise collection of the product and then either recycle it, or dispose
of it in an environmentally friendly way. This would be at no cost to customers, if they
purchase an equivalent new item from Quinter at the same time.

I don’t think many customers will take advantage of this. However, I believe that this policy
will give us a public profile as an environmentally-friendly company that promotes
sustainability, something that we can publicise in our annual report.

Exhibit 6 overleaf

ICAEW\SBM\J16 Page 17 of 18
Exhibit 6: Terms of reference – prepared by Mike Fisher

I would like RW to draft a report which:

(1) analyses the financial and operating data provided (Exhibit 3). This should explain
quarterly performance and identify any areas of operational weakness.

(2) identifies and justifies the additional data that should be made available at board level
which would aid its decision making for:

 sales and customer management

 inventory management.

(3) explains the financial reporting issues for the valuation of Quinter’s inventories and
recommends the information required to ensure that the company’s inventories are
valued appropriately in its financial statements.

(4) identifies and explains improvements in corporate governance that would assist
Quinter’s management control and performance management.

(5) evaluates whether the sustainability policy suggested (Exhibit 5) would:

 make a positive contribution to the public profile of Quinter; and

 generate additional useful management data.

ICAEW\SBM\J16 Page 18 of 18