pa2 issues

7/23/2019 PA2 Issues

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PA2 Issues

1. Business Expansion

Example # 1

Overall Analysis of Proposed U.S. ExpansionExpanding into the U.S. market and opening up a manufacturing plant in the United

States is a big decision for UTI. I have developed a list of strengths and eaknesses

immediatel! belo.

Strengths Establishing a U.S. manufacturing plant ill allo UTI to promote its products as

"assembled in the U.S.A.#$ attracting more American consumers. The U.S. market appears to have considerable revenue potential# resulting in

increased revenue for UTI. The U.S. consumer base is substantiall! larger than the %anadian consumer base. Strategicall!# UTI needs to explore ne markets# since sales in %anada are

plateauing. &! having a plant in the United States# shortages to American consumers should be

reduced or eliminated.

'eaknesses (ocusing on the U.S. market ma! take time and energ! aa! from the %anadian

market# and potentiall! harm UTI)s %anadian performance. %anadian consumers

ma! suffer in the long term. American consumers ma! still be reluctant to purchase UTI products if these

consumers find out that the U.S. %ompan! is oned b! a %anadian parent. Expanding into the United States creates a foreign exchange currenc! fluctuation

risk. *perating in a foreign countr! involves a significant amount of risk. UTI ould need

to ensure it becomes familiar ith and abides b! all the local manufacturing# tax# and

business regulations.

&ased on m! anal!sis# I see that this expansion ould offer UTI man! opportunities.

+oever# UTI needs to carefull! consider all the risks of expansion and consider a!s to

mitigate these risks. In this regard# I ould recommend that UTI perform a sensitivit!

anal!sis considering the orst,case scenario if sales in the United States did not triple#but sta!ed at current levels. If !ou ould like this done# please let me kno and I ould

be able to start orking on such an anal!sis. As ell# a back,up or contingenc! plan

should be prepared. If these additional steps are taken and all the risks are mitigated to

an acceptable level# then I ould recommend that the U.S. plant expansion should

proceed.Financial Accounting and ax !ssues


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If UTI forms a holl!,oned U.S. subsidiar!# it ould need to prepare consolidated

financial statements that include the operations of its U.S. subsidiar!. As UTI ould have

over -/ voting control# e ould treat both companies as one economic unit.

The U.S. subsidiar! ould be re0uired to file U.S. corporate tax returns as ell as an!

applicable U.S. state tax returns. Transactions beteen UTI and the U.S. subsidiar!ould need to be carried out at arm)s length# in order to compl! ith the transfer pricing

rules set out b! both the %anadian and U.S. tax authorities. Since U.S. corporate and

state tax issues as ell as transfer pricing issues are areas be!ond m! knoledge base#

I ould recommend that e confer ith a cross,border tax specialist to address these

issues. (inall!# this U.S. subsidiar! ould be considered a controlled foreign affiliate of

UTI)s1 thus# UTI ould be re0uired to file an annual information return (orm T3345,&6 to

%7A# disclosing various pieces of information about the U.S. subsidiar!# include details

of an! inter,corporate loans.

Example # "

!mpact on financing

As per plan the total expansion ill re0uire 89.-:# hich ill be financed through debenture

issue 8;: and the rest 83.- through debt financing. %onsidering current !ear financial

performance and recent economic recession it should be challenging to obtain mone! from the

market against issue of debenture# because the investor ill closel! anal!ividends pa!able at management)s discretion but interest must be paid regularl!.

:oreover# it is recommended that the compan! should explain the folloing issues to the

investors?


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The overall financial position of the compan! for 2@- is eak compare to 2@5. &utit is mainl! because of the recent economic recession. The situation ill improveonce the recession is over and expansion proect implemented.

'ith the implementation of expansion proect# maintenance cost ill reduce

significantl! hich ill help to reduce the production cost and increase gross margin.

Expansion proect ill help to maintain the product 0ualit! and to retain the presentmarket share.

In vie of the above# I ill appreciate !our comments regarding the issues I raised or an! other

concern !ou have.

Example #

Beneral?

, Expansion is risk!, =eed experienced staff, Personal motivation important, %urrent market share could be lost if the compan! doesn)t expand.

To access the feasibilit! of the expansion using three or more of?

, Sensitivit! anal!sis, =et %ash (lo assessed, =PC

". $as% Flo&

Example # 1

'e currentl! are experiencing cash flo difficulties. 'e are operating in a lo li0uidit! position

and this situation is not likel! to improve shortl!. 'e re0uire in the short term funding to get us

through until e see the benefits from longer term orking capital management improvement.

'e have several options to consider# as follos?

&ank Doan? 'e can approach our bank to extend our operating line of credit.

Although e are using our full line of credit# e ould need to re,negotiate a neagreement that ma! likel! be at a higher interest rate. The advantage of bank

financing is that the funds ill be available immediatel! if it is approved. (actor 7eceivable? 'e can sell our existing accounts receivable balance to another

compan! at a discount. This ill also provide immediate funds. +oever# the cost of

the discount ma! high. Issue more share capital? 'e can issue more shares at this point# ithout adding a

lot of value to the compan!.


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I believe our best option ith the least risk ould be to go to the bank for financing.

. Profita'ility

Example # 1

It seems that product costs have conse0uentl! not dropped and the loer than,expected sales

volume has failed to achieve the economies of scale and the s!nergies re0uired.

The production department should revie all costs in order to identif! potential cost,saving

strategies. +oever# the more likel! increase to profitabilit! ill come through increased sales. If

:allfort can increase sales volume ithout significant additional costs# it ould be the best a!

to improve the profits. +oever# if the higher volumes resulting from discounted prices do not

reach breakeven point# :allfort could potentiall! end up ith a loss instead of a profit. Therefore

an! discounts offered should take into account selling costs and maintain gross margin in the 2-

to 29/ range. :allfort should revie its product lines# market share# and competition to identif!potential ne markets or ne marketing strategies. The compan! should also assess the

viabilit! of continuing to maintain sales and distribution centres# as ell as timberland# milling#

and manufacturing facilities. Dinks in the vertical integration chain that are not profitable could

be potential candidates for divestment. :allfort should consider the advantages and

disadvantages of vertical integration. =on,financial factors such as control of pricingdeliver! in

the suppl! chain and flexibilit! to seek loest price should also be considered.

The main issue facing :allfort is poor sales. If management believes it can double its sales ith

these ne stores# it should invest in them since it can then eno! the economies of scale from its

state,of,the,art production facilities.

+oever# :allfort should carefull! evaluate if the sales proections are realistic in light of the

economic conditions and of the probabilit! of the ne stores) success if the! replace their

existing products ith those manufactured b! :allfort.

(. Business )erge

Example # 1

This report ill outline the issues regarding the proposed merger.

Fe! Performance Indicators FPIs6


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%urrentl!# Atled (amil! Services A(S6 has no FPIs to measure the success of the organi


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to happen ill onl! increase this fear. 'e ma! have ke! emplo!ees leave either organi


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competitive financial ratios# such as the current ratio. Improving our financial leverage and

increasing the amount of cash in our compan! from the sale of shares can help reduce debt and

negotiate better interest rates on outstanding debt.

As an IP* can be distributed to a variet! of investors# consumer aareness ill increase# hich

can also increase sales. In addition# emplo!ee motivation ma! improve as there ill be more

opportunities for groth and promotion. *ffering emplo!ee stock,option plans ill be a good

alternative to excessive age increases and ill serve as an incentive for emplo!ees to have a

sense of onership and align their long,term interests ith that of the compan! G increasing

the profitabilit! of the compan!.

A disadvantage of becoming a public compan! is increased accountabilit!. A public compan!

must provide more financial reporting and disclosure information# such as disclosing the

compensation of executive officers and preparing an :>HA report and interim financial

statements. There ill also be a change in control as our compan! ill need to report to# and

receive approval from# shareholders for maor business activities# rather than ust !ourself.

The costs to go public can be substantial. Preparing an IP* incurs legal# underriter# securities

registration# consulting# and auditing fees. 'e should consider our tax plan# as a private

compan! ma! receive different tax incentives than a public compan! such as the small

business deduction6. *ur annual auditing fees ill increase hen e are a public compan!# as

e ill need to compl! ith increased financial reporting and auditing re0uirements. S:D should

also consult ith its auditors to discuss tax planning and determine an effective tax strateg!

both for its %anadian operation and an! future expansion globall!.

(inancial reporting re0uirements ill be more extensive and stringent if S:D becomes a public

compan!. An annual audit ill be re0uired. A private compan! is permitted to use AccountingStandards for Private Entities ASPE6 or can elect to use International (inancial 7eporting

Standards I(7S6# but a public compan! must use I(7S. Thus# if e are planning to issue an

IP*# e can elect to adopt I(7S even before S:D becomes a public compan! and have an

audit done. This ma! help to give the oners# underriters# and other interested parties a better

financial picture of the compan! and provide a basis of comparison from one !ear to the next.

%urrentl! the financial ratios are based on ASPE and meet the re0uirements under S:D)s debt

covenant. +oever# sitching to I(7S ma! impact on these ratios and comparabilit! from one

!ear to the next. S:D should alert the bank of this changeover and renegotiate covenants.

. $onflict among employees

, %** ill take the initiative, Productivit! lose, Staff turnover, %ompan! reputation

/. Stoc0 option plan


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'hile revieing the 2; books in preparation for the audit# I have noticed that the option

expense as booked in 2; hen the options ere granted. Actuall! e need to defer the

expense in 2; and amorti


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1. Financing Option

35. :ake or bu!

3-. Cariable vs. Absorption costing

3;. S' Purchase

39. Emplo!ee vs. %ontractor

3. Investment >ecision

3L. (oreign %urrenc!

>uring the reporting time# parent compan! needs to translate their subsidiaries financial

statements to their functional currenc!.

IAS 23

:onetar! items cash# A76 K as per rate of the balance sheet date. An! gain or loss

should go to the income statement. =on,:onetar! items PPE6 K as per historical rate. Bain or loss should go to the *%I.

'ill not be taxable until reali


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24. 7isk :anagement

, &usiness 7isk? Darger manufacturers have plan to develop the same product# hich ill

increase our business risk. In order to mitigate the risk e should continue to remain

innovative b! undertaking research and developing proects. 'e should focus on gaining

customer lo!alties b! increasing 0ualit! and service., (inancial 7isk? If e take loan from the bank# there is no risk to lose the control over the

compan!. :oreover# the interest pa!ments against loan are tax deductible.

=evertheless# the loan ould increase our financial risk as a result of using debt., Product 0ualit! 7isk? >ue to mixeddifferent inputs used to manufacture the final product., Economic 7isk? Since the product is much more expensive than regular product# in time

of recession# people ma! not illing to pa! the extra price., Political 7isk? Bovernment ma! ithdra the tax credits., (oreign exchange 7isk? :itigate this risk K hedging. The a!s of hedging are future#

forard H options. +oever e ma! use the natural hedging inter compan!

transactions6.

, (oreign *peration 7isks? PEST Political# Economical# Social# Technological6, Supplier 7isk? If e import an! items from %hina or India.

Dong term strategic planning is re0uired to deal ith risks.

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