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Abacus Company Limited

Abacus Company Limited. Core Comprehensive Case. Primary Indicators. Assess the appropriateness of ACL acquiring TPI including an assessment of how the acquired business will fit with ACL How should I structure the acquisition to create the optimal tax structure for both ACL and Mrs Gillis

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Abacus Company Limited

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  1. Abacus Company Limited Core Comprehensive Case

  2. Primary Indicators • Assess the appropriateness of ACL acquiring TPI including an assessment of how the acquired business will fit with ACL • How should I structure the acquisition to create the optimal tax structure for both ACL and Mrs Gillis • Discuss the engagement considerations and procedures required to both validate the representations and perform the inventory audit pursuant to the draft agreement

  3. Primary indicators • How should ACL finance the deal if they were to proceed with it • Should I acquire and implement a new, fully integrated, customised accounting and reporting system in TPI if I acquire them. • Are there any relevant ideas or issues relevant to Mr Norwoods personal tax situation.

  4. Solution

  5. Why do you want to buy it? • Does the acquisition tie in with our strategic objectives? • Can we create synergy?

  6. Risks and Opportunities • Opportunities • Earnings potential if properly managed • Access to printing capacity (as per case) • Access to new authors and contacts (as per case) • Cost efficiencies • Cross selling • Diversification – risk reduction?

  7. Risks • Earnings potential of TPI is questionable – large losses that are exceeding budget (ratio analysis of balance sheet) • Government subsidy programme is being abolished • No experience in the book publishing business • Marketing synergies may not exist – two very different markets • Staff morale of TPI is very low – high employee turnover • Peter Norwood is 52 – should he be expanding the business at that age? • Peter Norwood won’t have the time to manage the business on a daily basis

  8. Mr Gillis • Founded the company • Most prolific writer – 33% of sales in 2011 • Highest margins • Had the contacts in the universities • Company has had heavy losses since he died

  9. Valuation • €1,000,000 plus • Net asset value at July 31, 2012 • Book value of equity today equates to €449,000 giving a total purchase price of €1,449,000 • Net asset value today (at realisable values) can be calculated as per the following slide

  10. Net asset value • Per valuer € 9,400,000 • Adjust inventory downwards to cost price (2,400 – 1,931) € (469,000) • Other current assets € 3,778,000 • Current liabilities €(6,083,000) • Long term debt €(4,230,000) • Deferred tax €( 210,000) • Net valuation€ 2,186,000

  11. Issues surrounding net asset valuation • Inventory recoverability – returns are included in inventory • A/R – two years return period; overordering • Recoverability of the author advances

  12. Accounting adjustments • Revenue recognition • General principle of IAS 18 • Cannot recognise revenue on the receipt of an order • Appears to be over-ordering (two year return period) • Inventory • Basic principles of IAS 2 • Complimentary copies are recognised as inventory • Returned copies are shown in inventory • Deferred taxes • Basic principles of IAS 12 • Losses forward – asset? • Each of the above will have an impact on the purchase price!!

  13. Tax consequences for both ACL and Mrs Gillis • No Retirement relief for Mrs Gillis as sales proceeds exceed €750K • No marginal relief either as proceeds exceed €1,250K (S598 TCA 1997) • Consideration to purchasing the assets separately • Give rise to a potential CGT liability for the company • Mrs Gillis then will have another potential CGT liability on ultimately selling the shares • Mrs Gillis will be assessed to CGT based on the deemed cost of the shares when Mr Gillis died • TPI may claim relief on the €330k losses forward as long as there’s no major change in the nature and conduct of the business (S401 TCA 1997)

  14. provide assurance of Mrs Gillis’ representations • We’re asked to effectively ‘audit’ her representations • Several representations are made • ‘books and records fairly and correctly set out and disclose all material transactions in accordance with GAAP • ‘the business has been carried on in the ordinary course since July 31, 2011’ • All material liabilities are disclosed

  15. What type of audit? • Full audit would be the most comprehensive • Time constraints would probably not allow this • ‘Special purpose assurance engagement’ • Must clarify with Peter Norwood the nature and extent of the work that we will perform • High risk engagement – it will be difficult to confirm or otherwise her representations; therefore a low materiality level • We already know that certain transactions are not being accounted for in accordance with GAAP

  16. Procedures • Letter of engagement • Review corporate minute books • Search corporate registries for liens and possible claims • Correspond with legal counsel • Correspond with major customers to determine possible returns • Review and attend the inventory count at the effective date • Review author advances for possible losses • Creditor reconciliations • Debtor reconciliations • Review loan agreements • Review contracts with major authors

  17. Inventory Audit • Conflict of interest? – we’re appointed by both the vendor and purchaser! • Assuming that we can proceed • Agree the basis of valuation; fair value, cost etc.. • Attend the count • Verify the count procedures • Test for existence and assess obsolescence • Review the cost records, material/labour and overhead absorption • Review and test cutoff procedures • Correspond with customers to confirm returns expectations • Ensure that complimentary books are not included in inventory

  18. IT Decisions facing TPI • Conduct a needs assesssment • Can an off the shelf system meet the needs requirement? • It’s cheaper to finish the bespoke system ; €150,000 versus €200,000 • Will the bespoke system work? • Is Ryan competent? • Can it be integrated with ACL if the takeover proceeds? • The money spent to date is a sunk cost

  19. Financing the acquisition • Unlikely that we can borrow through TPI – debt levels are too high and it’s loss making • We can use some of our cash balances and borrow long term for the remainder • Match the term of the finance with the term of the asset • Agree an earn out with Mrs Gillis? • Mention that Peter Norwood does not like debt • Don’t use personal assets!

  20. Peter Norwood personal tax • Shareholders loan • S31 (10% net assets rule) illegal transaction • Close company restriction • Transfer 50% of shares to spouse • Retirement relief – 55 years of age • Salary rather than dividend – why? • Pension

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