Management Level Step 3 – Marking Scheme and

Suggested Solutions

TASK 1
Marks
Marking scheme
Sub-task (a): Balanced scorecard critical assessment Up to 2
Up to 2 marks per relevant well-explained point which could include: each

• Top down control

• Must be specific
• Time to implement
• Conflicting measures
• Too many measures
• Management commitment
Maximum for sub-task (a)
12

Up to 2
Sub-task (b): Performance objectives and measures
each
Up to 2 marks per relevant well-explained point which could include:

Importance of non-financial performance measures

Innovation and learning perspective:

Objective: Improve staff satisfaction
Measure: Staff retention percentage at each hotel

Internal business perspective:

Objective: React to feedback gathered from social media review sites
Measure: The percentage of online reviews analysed

Customer perspective:
Objective: Improve the popularity of each hotel
Measure: The number of repeat visits at each hotel

Maximum for sub-task (b)

13

MAXIMUM FOR TASK 1 25

Tutorial note: You will earn marks for relevant points even if they are different from the
ones we have included in the suggested solution.
Suggested solution
Sub-tasks (a) and (b) related to the I CAN statement:
I can advise on the measurement, analysis and reporting on the performance of
responsibility centres

Balanced scorecard critical assessment

Top down control
The balanced scorecard should not be used to exert top down control. In order to be effective,
target setting should be a collaborative process. Targets should be based on information from
those that are most applicable to the operations at Alpaca. As a ready-made scorecard, your
proposal does not currently include any input from anyone within the business, and therefore
the chosen measures may not be suitable. As an example, ‘cannot book cheaper elsewhere’
would not apply to Alpaca as it operates in the luxury end of the hotel market and will therefore
charge a higher room rate than many budget and standard graded hotels.
I would strongly recommend that input from all of Alpaca’s divisions is sought. By involving the
directors from each division their morale and motivation will improve, which is particularly
important as we aim to grow the business. Engagement from all who will be involved in
achieving targets is important to avoid the balanced scorecard becoming no more than a
documentation exercise that happens at the end of every month.
Must be specific
No two organisations are the same, and therefore a ready-made balanced scorecard such as
the one you have provided will add little or no value. The sample balanced scorecard that you
attached is not designed for Alpaca nor aligned to Alpaca's strategy, and therefore I question
the value of many of the selected measures. For example, the sample you have provided has
a financial goal of ‘succeed’, measured via ‘increase occupancy rate to 90%’. This measure is
unlikely to be relevant to Alpaca across all of its 50 hotels given that occupancy rates vary
from a budgeted level of 78.9% at the Central division to 85% at the North division. Actual
occupancy rates at Alpaca’s central hotels have been below budget for the quarter March
2020 reaching only 73.1%. Perhaps a better measure for Alpaca would be to ‘increase
occupancy rates by 6%’.
Time to implement
The implementation of the balanced scorecard is not a one-off task that can be quickly
achieved. The board of Alpaca should agree on an appropriate timeframe for the
implementation and consider any cultural issues that may arise. Once implemented, measures
should be regularly reviewed to make sure they remain relevant as the market continues to
grow and evolve.
For example, the plan is to appraise the current internal performance of Alpaca to address the
issue of declining revenue and profits in 2019. Given that revenue and profits are below budget
in the first quarter of 2020 at the Central division, this could result in the process being rushed
to ensure it is actioned in the second quarter of 2020 resulting in employee resistance to its
implementation.
Conflicting measures
There are some measures in the scorecard that may naturally conflict, and it is often difficult
to determine the balance which will achieve the best results. For example, if Alpaca wishes to
invest in a new hotel in a popular destination in Maylandia in order to gain a competitive
advantage, this will result in an increase in capital investment costs, which may conflict with
some financial measures such as increasing cash flow. Because of potential conflicts it is
important for Alpaca to identify the relationships between perspectives as it will allow the
company to implement its strategies more successfully.
Too many measures
Appropriate measures, which are specific to Alpaca, must be devised, but also the number of
measures must be agreed. Too many measures will result in ‘information overload’ and there
is a concern that these targets become the overriding goal to the detriment of our primary goal.
For any profit-making organisation, including Alpaca, this will be to maximise the wealth of our
shareholders.
When selecting measures, it is important to measure things that add value. Alpaca focuses
on delivering value by meeting the developing needs of guests for hospitality services
associated with leisure and business travel. In the sample scorecard one of the objectives
under the financial perspective looks at decreasing the service cost per room. This may not
be appropriate for Alpaca as they aim to create value through the creation of a calming and
attractive environment at each of its hotels. This could mean that it takes longer to clean a
hotel room to ensure Alpaca’s high standards are maintained. It is therefore important that
housekeeping staff do not feel rushed due to the need to meet organisational goals enforced
by the scorecard.
Management commitment
The balanced scorecard can only be effective if senior managers commit to it. If they revert to
focusing solely on the financial measures they are used to, then the value of introducing
additional measures will be reduced. Zoe Diaz has already raised concerns about the
implementation. A lot of time will be invested by the board when setting appropriate measures
and Alpaca needs to ensure that it reaps the full benefit.

Performance objectives and measures

Importance of non-financial performance measures
Financial performance measures have their weaknesses, namely that they relate to the past.
A problem with the financial accounting model is that it does not adequately consider the value
of the organisation’s intangible assets. For example, in relation to Alpaca, financial measures
would overlook the value attached to Alpaca’s brand and the skills held by its team members.
The balanced scorecard is favourable as it incorporates non-financial measures of the drivers
of future performance as well as financial measures of past performance.
Innovation and learning perspective
The innovation and learning perspective is concerned with how an organisation sustains its
ability to change and improve to achieve its objectives.
Performance objective
Alpaca focuses on effectively using its resources to deliver and capture value. Alpaca is a
major employer providing careers in the hotel industry while also creating jobs for unskilled
staff. Therefore, an appropriate performance objective would be to ensure that Alpaca’s staff
are satisfied in their roles and provided with opportunities to develop their careers if they want
to.
Performance measure
An appropriate performance measure to assess staff satisfaction is to measure the staff
retention percentage at each of its individual hotels. The sample scorecard refers to the
number of hotel managers employed for over a year as a suggested performance measure
however it will not only be the satisfaction of hotel managers that is important. Staff throughout
each hotel in all departments will work together to ensure that Alpaca meets its objective of
increasing occupancy rates and delivering high guest satisfaction in the process.

Internal business perspective

The internal business perspective is concerned with the business processes an organisation
must excel at to achieve its objectives.
Performance objective
Alpaca’s business model focuses on delivering value by meeting the developing needs of its
guests. Remaining responsive to guests changing tastes is therefore particularly important to
Alpaca. An appropriate performance objective would be to ensure that Alpaca continuously
reviews and reacts to the feedback gathered from social media review sites such as
Visitadvisor. Alpaca should review the feedback gathered to establish the expectations of their
guests, to understand what additional services their guests want and to identify what factors
are scoring high or low on review websites.
Performance measure
An appropriate performance measure to assess Alpaca’s ability to remain responsive to
guests needs would be to measure the percentage of online reviews analysed. A target could
be set to analyse 95% of all online reviews of Alpaca’s 50 hotels.
Such a measure would help to ensure that Alpaca is responding to the areas that guests deem
to be most important. For example, at Alpaca’s Mayburgh Principal hotel ‘quality of service’
has the lowest rating from Visitadvisor of 3.2. This indicates that Alpaca should perhaps invest
in staff training at this particular hotel to improve the quality of service provided.
Customer perspective
The customer perspective is focused on how an organisation needs to appear to its new and
existing customers to attract them to continue using its products or services.
Performance objective
One of Alpaca’s key objectives is to deliver high guest satisfaction. If guests are satisfied,
they will often either extend their stay at a hotel or return for an additional visit in the future. A
suitable performance objective for Alpaca would be to determine the popularity of each of its
50 hotels with both its business guests and personal individuals. Such an objective would help
the company to understand consumer preferences better and make improvements to those
hotels where customers chose not to return for future stays.
Performance measure
An appropriate performance measure would be to measure the number of repeat visits at each
hotel. Guests are often said to ‘vote with their feet’, those that are not happy would choose not
to return to a particular hotel. Recording the number of repeat visits at each hotel and
comparing the results within each of Alpaca’s three divisions would ensure that Alpaca
improves its understanding of the popularity of its hotels. Alpaca would want to understand if
it is losing revenue to competitors because customers are choosing not to return to its hotels
as they are not satisfied with the service provided.
TASK 2
Marking scheme Marks
Sub-task (a): Analysis of financial performance Up to 2
Up to 2 marks per relevant well-explained point which could include: each
Change in revenue
• Alpaca's revenue decrease may be due to:
o Competitive industry – not invested in enough promotion?
o Visitadvisor rating low at 3.8 – affecting bookings?
o Inappropriate room pricing – is data/algorithm correct?
Gross margin
• Decline in revenue not matched by equivalent decline in cost of sales
• Cost of sales includes staff costs – Alpaca may have employed more
agency staff in 2019, which would result in increased costs
Operating margin
• Alpaca's operating margin decreased due to decrease in gross margin
and increase in operating costs
o Admin expenses increased – potential inefficiencies within
support systems
o Distribution costs increased by 17% - relates to costs of
processing bookings – potential inefficiencies in IT
o Other operating expenses increased by 35.5% probably due to
loss on sale of PPE and higher depreciation charge. Potentially
increased promotional spend not yet reflected in sales.
Conclusion
• Difficult year for Alpaca – decline in revenue and margins
• Decline in revenue appears to continue into 2020 per Central region
budget vs actual figures
Maximum for sub-task (a)
15
Sub-task (b): Practical measures to improve team performance

Up to 2
Up to 2 marks per relevant well-explained point which could include:
each
• Clarity of purpose and near-term objectives
• Teamwork focused on the task
• Strong leadership
• Encourage new ways of doing things
• Rewards

Maximum for sub-task (b)

MAXIMUM FOR TASK 2 10
25
 Tutorial note: You will earn marks for relevant points even if they are different from the
ones we have included in the suggested solution.

Suggested solution
Sub-task (a) is related to the I CAN statement:
I can use the financial statements to assess and report on financial performance and
position, interpreting and reporting on a wide range of ratios.

Analysis of financial performance

Change in revenue
Alpaca's revenue has decreased by 1% (M$5m) during 2019. There are several possible
reasons for this:
• The hotel industry is very competitive. It may be that Alpaca did not invest enough in
2018 in advertising and promotion and this has had a negative effect on revenue in
2019.
• Alpaca's Visitadvisor average rating is currently 3.8. This seems low for a luxury hotel
chain and may have resulted in lost sales for Alpaca. It is especially concerning that
the category with the lowest rating is 'quality of service' at 3.2, especially since one of
Alpaca's values is 'attention to detail - we believe that a hotel is only as good as the
service it provides’.
• Alpaca may have inappropriately priced its rooms during 2019, and therefore not made
as many sales as it could have. Alpaca should consider whether its pricing algorithm
and the data entered into the algorithm are appropriate.
Gross margin
Gross margin has fallen slightly to 39.5% in 2019 from 40.1% in 2018. This slight reduction in
gross margin is because revenue has fallen but cost of sales remained constant. As cost of
sales represents direct costs, we would have expected these to reduce in line with the
reduction in sales.
Cost of sales includes staff costs which have increased in 2019. It may be that this increase
is due to Alpaca employing more agency staff in 2019. Given that agency staff cost around
three times more than Alpaca’s own staff, this would result in increased staff costs. The
management accounts for the three months to March 2020 show increased staff costs for
Alpaca’s Central hotels vs the budget, which could also be due to employing more than
expected agency staff. Alpaca should investigate whether it has an issue with high staff
turnover or staff morale which has led to the increased use of agency staff.
Operating margin
Alpaca's operating margin has decreased by 4.3 percentage points from 15.5% in 2018 to
11.2% in 2019. This reflects the decrease in gross margin (discussed above) and the fact that
operating expenses have increased. Each type of cost is considered:
• Administrative expenses have increased by 4% (M$3m) to M$79m compared to 2018.
Given the decline in revenue, this increase suggests that there may be inefficiencies
within the support systems at Alpaca that have not been addressed. It is likely that
head office expenses are included within admin expenses.
 • Distribution costs have increased quite significantly by M$3m (17%) to M$20m in the
year. Distribution costs in a hotel chain generally relate to the costs of processing
bookings. This is likely therefore to include expenses associated with online bookings,
website maintenance and emailing booking confirmations. Alpaca should therefore
consider if their IT systems can be improved to process these bookings more
efficiently.
• Other operating expenses have increased by 35.5% to M$42m compared to 2018.
This is a large increase in light of the 1% decrease in revenue.
Alpaca has sold property, plant and equipment (PPE) during the year, as seen in the
statement of cash flows. If this is related to the disposal of a hotel building or related
fixtures and fittings, the loss on disposal of M$29m will likely have been charged to
other operating expenses. Furthermore, the purchase of PPE (again as seen in the
cashflow) will have resulted in a higher depreciation charge, and so higher operating
expenses during 2019 compared to 2018.
The increase in other operating expenses may also be due to increased promotional
spend for the upcoming Year of Culture, the sales expected as a result of this spend
will not be seen until 2021.
Conclusion
Overall, Alpaca has had a difficult year with a decline in both revenue and gross and operating
margins. The decline in revenue appears to have continued into 2020, at least for the Central
region, which shows reductions in revenue and margins against budget for the quarter to
March 2020. In terms of costs, there are several areas in which Alpaca could look to improve
efficiency and decrease costs, eg staff costs.

Sub-task (b) related to the I CAN statement:

I can recognise the characteristics of high performing teams.

Practical measures to enhance the performance of Alpaca’s teams

Clarity of purpose and near-term objectives
Although, Alpaca has a mission statement, aims and objectives, these are set at a strategic
level. For example, one of the company’s objectives is to ‘increase occupancy rates and
deliver high guest satisfaction in the process’. However, these objectives do not appear to
have been translated from the strategic level of the organisation to the operational level as
both occupancy rates and customer review ratings have declined.
Alpaca should ensure that strategic level objectives are translated into sub-objectives which
are filtered down throughout the organisation, so that all teams have their own objectives
which support the organisation’s overall strategy. For example, if it is important to guest
satisfaction that they are served their meals at the restaurants within a certain time from
ordering, then kitchen and waiting staff could have this set as a team objective.
Teamwork focused on the task
Alpaca has several values that it wishes its employees to embody. These are integrity,
attention to detail, excellence, enthusiasm and teamwork. Because the organisation promotes
itself as a luxury service, it is critical to its success that teams are always focussed on these
values. Even if staff are focussed on say, attention to detail and excellence 90% of the time,
the 10% of the time in which they are not focussed may result in a disproportionate effect on
guest satisfaction. This is because guests are more likely to remember the odd one or two
things that were not quite right rather than the 10 or 20 things that were as they expected.
The Visitadvisor rating of 3.8/5 is below what is likely to be expected of a luxury hotel chain,
and the guest review comment about having to leave the swimming pool on their first night
because a lifeguard was not on duty indicates that there are times when staff are not 100%
focussed.
Alpaca should investigate the reasons why team focus has not always been 100% and take
measures to help prevent lapses in concentration reoccurring in future. This may mean, for
example, allowing staff more or longer breaks to help refresh them, or increasing staffing levels
to ensure all staff have enough time to give their best to the guests (although this may actually
cause an increase in staff costs).
Strong leadership
In light of the need to set sub-objectives to teams and improve employee focus, it might be
necessary for Finely Rae to adapt his style of leadership. Although, little is known about his
approach to leadership, setting specific objectives for teams rather than just having general
ones at a strategic level will be a cultural change for the organisation. This change may be
resisted at first and therefore it is important for Finely to demonstrate strong leadership to push
the change through.
Encourage new ways of doing things
At present Alpaca’s teams appear to be largely empowered in terms of deciding how they
perform their work. For example, hotel managers have responsibility for running their hotel as
they choose, although there is some consultation with head office in regard to staffing levels
and budgets. Also, food and beverage managers have responsibility for ordering perishable
goods, although other procurement is done centrally. It is not clear how much scope hotel
management teams have to innovate, either in terms of the service or facilities they provide,
or in how staff perform their role. Consistency of service is important to guests so they know
what to expect from the brand and feel at home, therefore it is important for innovation to be
managed centrally so that changes can be managed across all hotels in the chain.
Alpaca may improve the performance of its hotel management teams by encouraging them to
think of new ideas for exceeding guest expectations or for the services their hotel provides.
These ideas should be referred to head office for approval before rolling them out, just to
ensure they are appropriate for the brand. The best ideas could then be shared with other
hotels in the chain.
Rewards
There may be scope for Alpaca to introduce its own reward scheme as a way of motivating its
teams to achieve better levels of performance. No such scheme currently exists at Alpaca, but
such a measure may be appropriate if the issuing of rewards can be configured in such a way
as to combine the performance of individual staff members with the performance of their
respective team. This would be in respect of the team meeting the new objectives that they
are set. If deemed appropriate it might be possible to issue monetary rewards to reflect the
performance of those teams which generated the greatest level of guest satisfaction or repeat
business over the course of a year. Such a measure may help to incentivise Alpaca’s teams
to improve their performance. The introduction of any reward scheme would however need to
be carefully considered to ensure that it did not lead to dysfunctional behaviour.
TASK 3
Marking scheme Marks
Sub-task (a) – Challenges in ensuring that the year of culture Up to 2
team is effective. each
Up to 2 marks per relevant well-explained point which could include:
• Lack of experience
• Impact on workloads
• Limited scope to volunteer
• Impact on career prospects
• Lack of formal objectives
• Lack of leadership
• Lack of co-ordination

Maximum for sub-task (a) 13

Sub-task (b) – Challenges associated with determining the

opportunity cost to use for transfer pricing

Up to 2 marks per relevant, well-explained point which may include: Up to 2

• Entity level each
• Department level
• Resentment
• Goal congruence
• Opportunity benefit
• Performance measurement

Maximum for sub-task (b) 12

MAXIMUM FOR TASK 3 25

Tutorial note: You will earn marks for relevant points even if they are different from the
ones we have included in the suggested solution.
Suggested solution

Sub-task (a) is related to the I CAN statement:

I can identify the key project personnel, explain their responsibilities and set appropriate
performance measures.

Challenges in ensuring that the year of culture team is effective.

Lack of experience

One of the biggest challenges associated with the establishment of the new year of culture
team concerns the fact that evidently not all of the senior managers that are to be seconded
to this team will have experience of working in the field of culture and cultural events. Although
the team will have experience of marketing, the lack of experience regarding culture and
cultural events may significantly hamper the ability of the team to be effective. This lack of
experience may create job related stress, especially if this heightens feelings of incompetence
in performing the work required. Such stress will most likely be exacerbated given the high-
profile nature of the new team. This means the team should be given the full backing of the
board and an understanding that they will be doing their very best given this lack of experience.
It may be appropriate for the organisation to bring in an external consultant who has
experience in the field of culture as further support to the team.

Impact on workloads

The senior managers that are to be seconded to the new team may be concerned about the
impact that their involvement will have on their workloads. This is more likely to be problematic
if these individuals are expected to complete their existing work in addition to their work with
the year of culture team. This may be alleviated in part if other members of staff remaining in
those divisions cover their work. Either way, it would appear likely that some individuals will
inevitably have their workloads increased, and this may have a negative effect on morale and
employee effectiveness.

Limited scope to volunteer

It appears unclear whether senior managers will have the opportunity to volunteer to join the
new team or whether they will simply be selected by the board with little say in the matter. The
fact that the board haven’t yet determined which individuals will be selected to join the team
suggests that those chosen will have little scope to resist. A lack of participation in a decision
such as this is likely to cause stress and may damage the morale of those senior managers
selected. Those senior managers who are not based locally may be concerned about the
expectation that they will need to travel and be away from their homes and colleagues for one
week every month. Imposing this will inevitably affect the work-life balance among these senior
managers, which may facilitate them deciding to leave the business. If people are not
motivated when initially seconded this will severely affect their ability to contribute effectively
to the work of the new team.

Impact on career prospects

While some of the senior managers seconded to the new team may view it positively in terms
of enhancing their career prospects, this may not universally be the case. There is an inherent
danger for those selected to join the team that due to their regular absence from their own
divisions, they may get passed over for promotion. Furthermore, some of the managers may
view their involvement in the new team as representing a backward step in their careers,
especially if they perceive the work to be at a lower level to where they are now. Fears over
such matters heighten the scope for the senior managers to not fully engage with the work of
the new team thereby reducing the effectiveness of their contributions.

Lack of formal objectives

The effectiveness of the new team will be hindered if no formal objectives are in place to guide
its work. At present a rather broad goal has been set for the team which simply consists of
supporting the marketing department regarding the upcoming year of culture. To improve the
effectiveness of the team in realising this goal, meaningful objectives need to be set which
can be used to measure its performance. An appropriate objective might include achieving a
certain level of occupancy during the year of culture.

Lack of leadership

The effectiveness of much of the work undertaken by teams is often influenced by the
presence of a strong leader. At the current time no-one has been appointed to act as the
manager of the new team. Ideally an individual with experience and a broad range of skills in
overseeing what is in effect a project team should be appointed.

Lack of co-ordination
The appointment of a manager to oversee the team will be needed to ensure that meaningful
contributions can be made by the senior managers as each of them has skills in different
areas, which may be useful to different aspects of the new team’s work. Appointing a
designated manager should also ensure that the activities undertaken by the new team are
fairly allocated and well co-ordinated.

Sub-task (b) is related to the I CAN statement:

I can explain the behavioural and transfer pricing issues associated with internal trading.

Challenges associated with determining the opportunity cost to use for transfer pricing.
Entity level
It could be argued that the opportunity cost of diverting senior managers will be borne by
Alpaca overall rather than the individual divisions that they work for. If, say, the profit
generated by one of the hotels in the Northern division declines because a senior manager
from that division has been working with the new year of culture team rather than focussing
on growing his own division then the impact on profit will affect the entity as a whole rather
than just the Northern division.
Department level
It may be difficult to measure the opportunity cost to individual divisions because that may be
a simple matter of reallocating duties, with more routine work being passed down the divisional
management team. For example, a senior manager spending time with the new year of culture
team may pass his work down to his assistant. The assistant may be able to carry out his own
duties along with the additional work from his senior manager by working more efficiently. The
opportunity cost of the senior managers time in this instance would be zero.
Resentment
Any differences between charges made by different divisions could cause resentment and
friction between team members. A manager whose division negotiated a higher transfer price
could regard colleagues from other divisions as inferior, which could undermine the
effectiveness of the team.
Goal congruence
The transfer pricing policy should ensure that what is good for an individual division is good
for the company as a whole. The objectives of each senior manager taken from the individual
divisions should be aligned with the overall company objective of increasing occupancy rates
and delivering high guest satisfaction in the process. The transfer price should be set to ensure
that goal congruence is achieved.
Opportunity benefit
It could be the case that divisions do not actually suffer an opportunity cost due to the benefits
that will come from the newly formed year of culture team. Each division may actually benefit
from the secondment of senior managers. For example, the Central division will better
understand the requirements of guests during the year of culture, what services they will
request and how long they will want to stay for. This could lead to better decision making over
packages offered in 2021 and pricing strategies adopted. This could lead to a situation of
increased revenue for the Central division not only in 2021 but also in 2020. It may therefore
be regarded as illogical that each division is being allocated an internal charge.
Performance measurement
Finally, the transfer price should result in a report of divisional profits that is a reasonable
measure of managerial performance. If an opportunity cost is charged it must fairly reflect the
proportion of time devoted to the new year of culture team, performance objectives may need
to be realigned to reflect this opportunity cost.
TASK 4
Marking scheme Marks

Sub-task (a): Immediate strategies that Alpaca could adopt in response to Up to 2

the incident. each
Up to 2 marks per relevant well-explained point which could include:

• Contact those affected and their families

• Internal investigation
• Issue internal communications to all staff
• Issue an external press release
• Work with the Maylandian Health and Safety Administration (MHSA)
• Ingredient testing and liaising with food suppliers
• Closing down part or all of the hotel
• Liability considerations

Maximum for sub-task (a) 15

Sub-task (b): Need for a provision Up to 2

Up to 2 marks per relevant well-explained point which could include: each

To recognise a provision, need to meet criteria in IAS 37.

At present:
• Past event exists, but no present obligation as no offer of compensation yet
• Uncertain whether an outflow is probable
• No reliable estimate exists
Conclusion:
• No provision at the moment as too much uncertainty
• Instead disclose a contingent liability
• However, if compensation offer made, then constructive obligation created
• If guests launch legal action, legal obligation created

Maximum for sub-task (b) 10

MAXIMUM FOR TASK 4 25

Tutorial note: In sub-task (a), you will earn marks for relevant points even if they are
different from the ones we have included in the suggested solution.
Suggested solution

Sub-task (a) related to the I CAN statement:

I can advise on conflict management.

Recommended strategies to adopt in response to the incident

Contact those affected and their families
The senior leadership team at Alpaca should contact the affected guests and their families.
The focus of these efforts should be to provide reassurances that the cause of the outbreak
of sickness will be properly investigated. Paying for any medical care and transport to each
guest’s home would be appropriate, as would providing up-to-date information about the
cause of their sickness. These measures may help to stem any negative publicity resulting
from the incident. It would also be appropriate to cover these costs regardless of whether the
incident was as a result of negligence on the part of Alpaca or not.
Internal investigation
An internal investigation into the incident should be launched. This would most likely involve
bringing together a team from across Alpaca to commence an immediate investigation into
the events leading up to the outbreak of sickness. The severity of the incident warrants the
involvement of the senior leadership team in the investigation. Given their proximity to the
situation, it would probably advisable that the manager of the Mayburgh Principle Hotel, their
management team, as well as all chefs and other kitchen staff are not involved directly in the
investigation beyond answering any specific questions that the investigating team might
have. Allowing these parties, a greater level of involvement at this initial stage may give the
impression to external third parties that Alpaca is attempting to cover-up any instances of
wrongdoing.
Issue internal communications to all staff
Alpaca should issue a series of internal communications to keep all the company’s
employees updated on the current situation.
Keeping the organisation’s own staff informed of developments will be particularly important
as some of them may be approached by interested groups keen to gain a deeper
understanding of the cause of the incident. For example, it is likely that some of the
company’s travel agent partners may be concerned about the safety of guests that booked
through them as well as having general concerns that the same incident might occur again
at other hotels in the chain. As such it would be appropriate for the senior leadership team at
Alpaca to encourage staff to be as transparent as possible when dealing with such parties to
reassure them of the safety of guests and to explain that the incident will be fully
investigated.
Issue an external press release
In light of the highly publicised nature of the incident, it would be appropriate for Alpaca to
issue a press release detailing the action the company has taken to investigate the matter
and to respond to the article in the Maylandian Daily News, this could also be posted on the
company’s website and social media feeds. In the event of both positive and negative
developments regarding the current situation, Alpaca should proactively update any
subsequent press releases to keep stakeholders informed.
Work with the Maylandian Health and Safety Administration (MHSA)
The senior leadership team at Alpaca should contact the MHSA and offer to assist them with
their investigation. Alpaca’s intention here should be to be as open and transparent as
possible even if this means identifying failings with the hotel’s kitchen practices. This should
not be viewed as Alpaca’s opportunity to hide from its responsibilities, but instead represents
an opportunity to be proactive. In the event that Alpaca is found to have been negligent in
the activities leading up to the outbreak of sickness then the company should implement any
recommendations resulting from the investigation and pay any fines imposed by the MHSA.
Ingredient testing and liaising with food suppliers
Alpaca’s internal investigation should consider the food that was fed to the guests. Tests
should be performed on samples of perishable and non-perishable foods purchased by the
hotel for consumption by guests. If any ingredient is found to be contaminated or suspected
to be contaminated, then this information should be passed onto the MHSA. It is prudent for
the company to pay for its own testing of ingredients rather than just rely on the results of
any testing done by the MHSA. Such information may be vital in defending any subsequent
legal action.
At all times during testing, Alpaca should keep in touch with its food suppliers to keep them
informed and to ask them to do their own checks into the food that they supplied to the hotel.
If it is found that food supplied to the hotel was contaminated, then checks should be made
to ensure that supplies to other hotels in the chain are not affected as well.
Closing down part or all of the hotel
Whilst the investigation is continuing and the cause of the outbreak is unknown, the
company should consider temporarily closing the hotel either partially or completely. A partial
closedown would be to the restaurant and bar areas as these are likely to be the main areas
that the MHSA would be focussing their investigation on. The purpose of such as closedown
would be to allow the MHSA to complete their work. However, the company should also
consider closing the hotel entirely whilst the cause of the outbreak is unknown. The purpose
of this would be to ensure the health of all the guests. Ultimately, the business will need to
be led by the MHSA on this and should comply, in full, with any requests made.
Both types of closedown would have numerous impacts, not only on having to make
alternative arrangements for guests but may also result in substantial knock-on costs in
terms of transport and accommodation. However, it is vital that the company is seen to be
putting the health of guests above profit and therefore any knock-on costs should be
considered in that context.
Liability considerations
Despite Finley’s suggestion, it is unwise to pay compensation to affected guests straight
away. No liability should be accepted for the incident at this point. Paying compensation is
an admission of liability that would undermine any defence in respect of future lawsuits
which may be brought against Alpaca. However, in the future if Alpaca is found to have been
negligent then any award for damages should be settled quickly.
Tutorial note: It is important to note that you may have included a range of different points
to those stated in the answer above. Provided you justified the answer you gave you would
have still received some credit.
Sub-task (b) is related to the I CAN statement:
I can select appropriate accounting treatments and explain their implications for users of the
financial statements.

Need for a provision

The need for a provision should be considered in terms of the requirements of IAS 37
Provisions, Contingent Liabilities and Contingent Assets.
A provision is defined as a liability of uncertain timing or amount, but a provision can only be
recognised in the financial statements if all three criteria in IAS 37 are met.
To recognise a provision, there must be:
A present obligation (constructive or legal) that exists as the result of a past event.

At present, it is not clear if there is a present obligation as it is not certain whether the illnesses
were as a result of the actions of Alpaca. From the initial investigations management are still
unsure if the kitchen at the Mayburgh Principal Hotel was actually at fault and compensation
has not yet been paid to guests. If, however, Alpaca were to suggest to the guests that Alpaca
would compensate them, then a constructive obligation would be created – ie a valid
expectation in the guests that compensation would be paid. Similarly, if it were to be found
that Alpaca was at fault and the guests subsequently took Alpaca to court to sue for damages,
a legal obligation would be created. Despite Finley Rae’s suggestion, Alpaca has not yet
offered compensation to the affected guests therefore a present obligation does not currently
exist. Also, because the incident has just happened a court action for damages has not yet
taken place.

A probable outflow of future economic benefit.

A probable outflow is defined by IAS 37 as ‘more likely than not to occur’. At present, this is
not the case as there is no confirmed offer of compensation and no legal action has been
launched, so we cannot say that it is more than 50% likely that any compensation will be paid
to these guests. If, however, negotiations for compensation begin or if the guests launch a
legal action against Alpaca, this may change.
A reliable estimate of the amount that will be paid.
At present, there is no reliable estimate of any amount that will be paid. If compensation were
to be agreed, then we would have a reliable estimate. If legal action against Alpaca was
launched, then our legal advisors may then be able to provide a reliable estimate and
likelihood of any amount to be paid out. Neither situations apply at present therefore the
condition of a reliable estimate is not met.
Conclusion
At present, no provision should be made in Alpaca’s financial statements as there is too much
uncertainty over any amount that would be paid and whether a present obligation actually
exists.
However, this may change if Alpaca does decide to offer compensation or if the affected
guests launch legal action against Alpaca.

It appears that Alpaca currently has a contingent liability which should be disclosed, if material,
in its financial statements.