题目内容
Herman Swan & Co (HS) is a family-owned company that has made fashionable clothes and leather goods for men for over 100 years. The company has been successful in building a strong reputation for quality by sourcing from local textile and leather producers. It sells its goods across the world through a chain of owned shops and also franchised stalls inside large, well-known stores. The company is still owned and run by the family with no other shareholders. The main goal of the firm is to organically grow the business for the next generation of the Swan family.
Customers are attracted to HS products due to the history and the family story that goes behind the products. They are willing to pay the high prices demanded as they identify with the values of the firm, especially the high quality of manufacturing.
The competition for HS has been increasing for more than ten years. It is made up of other global luxury brands and also the rising national champions in some of the rapidly expanding developing countries. The competitors often try to leverage their brands into many different product types. However, the Swan family have stated their desire to focus on the menswear market after an unsuccessful purchase of a handbag manufacturer five years ago.
The company is divided into a number of strategic business units (SBU). Each production site is an SBU, while the whole retail operation is one SBU. The head office previously functioned as a centre for procurement, finance and other support activities. The company has recently invested in a new management information system (MIS) that has increased the data available to all managers in the business. This has led to much of the procurement shifting to the production SBUs and the SBU managers taking more responsibility for budgeting. The SBU managers are delighted with their increased responsibilities and with the results from the new information system but feel there is still room for improvement in its use. The system has assisted in a project of flattening the organisation hierarchy by cutting out several layers of head office management.
You are the management accountant at HS and have been trying to persuade your boss, the finance director, that your role should change. You have read about Burns and Scapens’ report ‘Accounting Change Project’ and think that it suggests an interesting change from your current roles of preparing and reviewing budgets and overseeing the production of management and financial accounts. Your boss is sceptical but is willing to listen to your arguments. He has asked you to submit an explanation of the change that you propose and why it is necessary at HS.
Also, your boss has asked you for an example of how your role as an ‘internal consultant’ would be valuable at HS by looking at the ideas of brand loyalty and awareness. You should consider their impact on performance management at HS, both from the customer and the internal business process perspectives and how to measure them.
Required:
(a) Describe the changes in the role of the management accountant based on Burns and Scapens work. Explain what is driving these changes and justify why they are appropriate to HS. (12 marks)
(b) Using HS as an example, discuss the impact of brand loyalty and awareness on the business both from the customer and the internal business process perspectives and evaluate suitable measures for brand loyalty and awareness. (8 marks)
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Coal Creek Nursing Homes (CCNH) is a company operating residential care homes for the elderly in Geeland. Residents are those elderly people who can no longer care for themselves at home and whose family are unable to look after them. There are 784 homes with about 30,000 residents under the care of the company. There are about 42,500 staff, who range from head office staff through the home managers to the care staff and cleaners and caterers. The company is a private company which aims to make a suitable return to its shareholders. It had revenues of $938m in the last year and is one of the largest providers of residential care places in Geeland.
The company is split into two divisions: General Care (GC) which handles ordinary elderly residents and Special Care (SC), which is a newer operation that handles residents who need intensive care and attention due to physical or mental ailments.
The company does not own its homes but rents these from a number of large commercial landlords. It has taken on a large number of new homes recently in order to cope with the expansion of SC, which has proved successful with 24% pa revenue growth over the last two years. GC is a mature business with little growth in a sector that is now fully supplied. GC has seen volumes and margins falling as price pressure comes from its main customers (public sector health organisations who contract out this part of their care provision).
A new chief executive officer (CEO) has just taken over at CCNH. She was appointed because the board of CCNH believed that the company was in difficulty. The previous CEO had been forced to leave following a scandal involving a number of the homes where residents’ money had gone missing and their families had called in the police. The finance director and the operations director had also resigned, leaving the company without any experienced senior management.
The board have tasked the new CEO with ascertaining the current position of the business and identifying a strategy to address the issues that arise. The CEO wants to address the strategy, deciding whether to divest or retain elements of the business.
The CEO has come to you, as the most senior member of finance staff, for assistance with this task. The first area that she wants help on is the problem that the business is having with its landlords. The company struggled to meet its most recent rental payment, which the bank eventually agreed to cover through an increase to the overdraft, as CCNH had no ready cash. She is upset that the chosen strategic measures of performance (earnings per share growth and operating profit margin) did not identify the difficulties that the firm is now facing. One of the other directors had mentioned gearing problems but she did not follow what this meant.
Also, she has heard of qualitative models for predicting corporate failure and wants to apply one at CCNH. Obviously, she wants to know if CCNH exhibits any symptoms of failure.
You have been given the outline financial statements to help with this task (see Appendix on the next page).
Required:
(a) Discuss why indicators of liquidity and gearing need to be considered in conjunction with profitability at CCNH. Illustrate your answer with suitable calculations. (11 marks)
(b) Explain one qualitative model for predicting corporate failure (such as Argenti) and comment on CCNH’s position utilising this model. You are not expected to give scores, only to comment on the areas of weakness at CCNH. (9 marks)
The Drinks Group (DG) has been created over the last three years by merging three medium-sized family businesses. These businesses are all involved in making fruit drinks. Fizzy (F) makes and bottles healthy, fruit-based sparkling drinks. Still (S) makes and bottles fruit-flavoured non-sparkling drinks and Healthy (H) buys fruit and squeezes it to make basic fruit juices. The three companies have been divisionalised within the group structure. A fourth division called Marketing (M) exists to market the products of the other divisions to various large retail chains. Marketing has only recently been set up in order to help the business expand. All of the operations and sales of DG occur in Nordland, which is an economically well-developed country with a strong market for healthy non-alcoholic drinks.
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The group has recruited a new finance director (FD), who was asked by the board to perform. a review of the efficiency and effectiveness of the finance department as her first task on taking office. The finance director has just presented her report to the board regarding some problems at DG.
Extract from finance director’s Report to the Board:
‘The main area for improvement, which was discussed at the last board meeting, is the need to improve profit margins throughout the business. There is no strong evidence that new products or markets are required but that the most promising area for improvement lies in better internal control practices.
Control
As DG was formed from an integration of the original businesses (F, S, H), there was little immediate effort put into optimising the control systems of these businesses. They have each evolved over time in their own way. Currently, the main method of central control that can be used to drive profit margin improvement is the budget system in each business. The budgeting method used is to take the previous year’s figures and simply increment them by estimates of growth in the market that will occur over the next year. These growth estimates are obtained through a discussion between the financial managers at group level and the relevant divisional managers. The management at each division are then given these budgets by head office and their personal targets are set around achieving the relevant budget numbers.
Divisions
H and S divisions are in stable markets where the levels of demand and competition mean that sales growth is unlikely, unless by acquisition of another brand. The main engine for prospective profit growth in these divisions is through margin improvements. The managers at these divisions have been successful in previous years and generally keep to the agreed budgets. As a result, they are usually not comfortable with changing existing practices.
F is faster growing and seen as the star of the Group. However, the Group has been receiving complaints from customers about late deliveries and poor quality control of the F products. The F managers have explained that they are working hard within the budget and capital constraints imposed by the board and have expressed a desire to be less controlled.
The marketing division has only recently been set up and the intention is to run each marketing campaign as an individual project which would be charged to the division whose products are benefiting from the campaign. The managers of the manufacturing divisions are very doubtful of the value of M, as each believes that they have an existing strong reputation with their customers that does not require much additional spending on marketing. However, the board decided at the last meeting that there was scope to create and use a marketing budget effectively at DG, if its costs were carefully controlled. Similar to the other divisions, the marketing division budgets are set by taking the previous year’s actual spend and adding a percentage increase. For M, the increase corresponds to the previous year’s growth in group turnover.’
End of extract
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At present, the finance director is harassed by the introduction of a new information system within the finance department which is straining the resources of the department. However, she needs to respond to the issues raised above at the board meeting and so is considering using different budgeting methods at DG. She has asked you, the management accountant at the Group, to do some preliminary work to help her decide whether and how to change the budget methods. The first task that she believes would be useful is to consider the use of rolling budgets. She thinks that fast-growing F may prove the easiest division in which to introduce new ideas.
F’s incremental budget for the current year is given below. You can assume that cost of sales and distribution costs are variable and administrative costs are fixed.
On the basis of the Q1 results, sales volume growth of 3% per quarter is now expected.
The finance director has also heard you talking about bottom-up budgeting and wants you to evaluate its use at DG.
Required:
(a) Evaluate the suitability of incremental budgeting at each division. (8 marks)
(b) Recalculate the budget for Fizzy division (F) using rolling budgeting and assess the use of rolling budgeting at F. (8 marks)
(c) Recommend any appropriate changes to the budgeting method at the Marketing division (M), providing justifications for your choice. (4 marks)
(d) Analyse and recommend the appropriate level of participation in budgeting at Drinks Group (DG). (6 marks)
Section B – TWO questions ONLY to be attempted
Stillwater Services (SS) is a listed water utility company providing water and sewage services to the public and businesses of a region of Teeland. The company was formed when the government-owned Public Water Company of Teeland was broken up into regional utility companies (one of which was SS) and sold into private ownership over four years ago.
As a vital utility for the economy of Teeland, water services are a government-regulated industry. The regulator is principally concerned that SS does not abuse its monopoly position in the regional market to unjustifiably increase prices. The majority of services (80%) are controlled by the regulator who sets an acceptable return on capital employed (ROCE) level and ensures that the pricing of SS within these areas does not breach this level. The remaining services, such as a bottled water operation and a contract repairs service, are unregulated and SS can charge a market rate for these. The regulator calculates its ROCE figure based on its own valuation of the capital assets being used in regulated services and the operating profit from those regulated services.
The target pre-tax ROCE set by the regulator is 6%. If SS were to breach this figure, then the regulator could fine the company. In the past, other such companies have seen fines amounting to millions of dollars.
The board of SS are trying to drive the performance for the benefit of the shareholders. This is a new experience for many at SS, having been in the public sector until four years ago. In order to try to better communicate the objective of maximising shareholder wealth, the board have decided to introduce economic value added (EVA？) as the key performance indicator.
The finance director has asked you to calculate EVA？ for the company, based on the following financial information for the year ending 30 September 2012:
Stillwater Services
2. Economic depreciation is assessed to be $83m in 2012.
Economic depreciation includes any appropriate amortisation adjustments.
In previous years, it can be assumed that economic and accounting depreciation were the same.
3. Tax is the cash paid in the current year ($9m) and an adjustment of $0·5m for deferred tax provisions. There was no deferred tax balance prior to 2012.
4. The provision for doubtful debts was $4·5m on the 2012 statement of financial position.
5. Research and development is not capitalised in the accounts.
It relates to a new project that will be developed over five years and is expected to be of long-term benefit to the company. 2012 is the first year of this project.
Required:
(a) Evaluate the performance of SS using EVA？. (13 marks)
(b) Assess whether SS meets its regulatory ROCE target and comment on the impact of such a constraint on performance management at SS. (7 marks)
SUPPLEMENTARY INSTRUCTIONS
1. You should assume that the tax rates and allowances shown below will continue to apply for the foreseeable future.
2. Calculations and workings should be rounded down to the nearest HK$.
3. Apportionments need only be made to the nearest month, unless the law and prevailing practice require otherwise.
4. All workings should be shown.
TAX RATES AND ALLOWANCES
The following 2011/12 tax rates and allowances are to be used in answering the questions.
Section A – BOTH questions are compulsory and MUST be attempted
1.
Organic World Inc (the Parent), a company incorporated in the US, has since September 2006 wholly-owned a subsidiary in Hong Kong, Green HK Ltd (Green-HK). Green-HK operates a retail store in Hong Kong and imports organic goods from the Parent and sells the goods in the store. It closes its accounts on 31 December.
Starting from January 2010, the Parent also has another wholly-owned subsidiary in China, Green China Ltd (Green-China), which operates a similar retail store in Mainland China but not in Hong Kong. Green-China has been performing very well in these two years, showing continuous increases in profitability, but Green-HK’s business has been declining significantly.
The Chief Executive Officer (CEO) of Green-HK called a meeting at which the following was discussed:
(1) The following extract of management accounts as at 30 November 2011 was presented:
(2) The Parent decided to cease the business in Hong Kong with effect from 1 January 2012. Before the store is closed on 31 December 2011, all the assets and liabilities of Green-HK would need to be cleared according to the following proposal:
(i) The land and store building would be sold to a potential purchaser, and the offer is still under negotiation. The tentative sale consideration is $12,000,000 comprising $11,000,000 for the land and $1,000,000 for the store building. The purchaser has counter-offered that if Green-HK were to demolish the building and sell the land site only, a higher offer might be considered. Based on Green-HK’s tax records, the land and building were acquired in July 2006 directly from the property developer at $10,000,000, 50% of which was attributed to the building. The CEO is wondering how the different modes of sale would impact the tax position of Green-HK. Moreover, the CEO is interested to know how much annual depreciation allowance the purchaser, who makes up his accounts to 31 March, might be entitled to claim if he continued to use the store as it is.
(ii) All the store equipment would be donated to a charitable organisation in Hong Kong. Any remaining minor furniture and fixtures not accepted by the charity would be scrapped. The CEO is wondering if the net book value of the equipment would be eligible for a tax deduction as a charitable donation, and whether it would be better if the equipment was sold first and then the sale money was donated to the charity.
(iii) To clear the trading stock on hand, Green-HK would sell it to Green-China at a price to be mutually agreed. Discussions with Green-China so far indicate that the deal would not be made unless the price was fixed at 30% below the usual market price. Although this is not desirable to Green-HK, it was expected that the Parent would consent to this deal. The CEO is concerned about the impact of the deal on Green-HK, especially in the light of the recent development of the transfer pricing principle in Hong Kong.
(iv) The amount due to the Parent of $15,000,000 would be waived by the Parent since Green-HK would not be likely to have the ability to pay. Green-HK’s records indicated that most of the amount represents the purchase cost of goods imported from the Parent for sale in the store in previous years but which remained unsettled.
(3) All staff members would be made redundant. On top of the statutory amount of redundancy payment, Green-HK was considering paying an additional gratuity representing two months’ salary. Before making the decision, the CEO wants to assess whether these payments would be tax deductible to Green-HK.
(4) Based on the tax records, Green-HK has brought forward tax losses of around $2,000,000 from 2010/11. The tax written down values for the plant and machinery pools are insignificant.
Required:
As the tax advisor to Green HK Ltd (Green-HK), prepare a report for the Chief Executive Officer (CEO) addressing the tax issues raised in the meeting as follows, providing supporting calculations where appropriate.
(a) Sale of land and store building (per item (2)
(i) of the meeting notes): (i) The tax implication to Green-HK arising from the sale of the land and store building, including a computation of the applicable depreciation allowance for each year of ownership and in the year of disposal; (4 marks)
(ii) The impact of the potential purchaser’s counter-offer on the tax position of Green-HK; (4 marks)
(iii) The annual depreciation allowance that might be available to the purchaser upon his acquisition of the land and store building, assuming that the store continued to be used as it was. (3 marks)
(b) Donation of equipment (per item (2)
(ii) of the meeting notes): (i) Whether, and if so how, the donation would qualify as a tax deduction for Green-HK; (4 marks)
(ii) Whether, and if so how, the alternative suggested by the CEO would help Green-HK get the tax deduction. (3 marks)
(c) Sale of trading stock (per item (2)(iii) of the meeting notes):
(i) The tax implication to Green-HK arising from the sale of trading stock to Green China Ltd (Green-China) at the price suggested by Green-China;
Note: You are not required to discuss the transfer pricing implications in this part. (4 marks)
(ii) The impact of the current development of transfer pricing principles in Hong Kong on the suggested sale transaction. (5 marks)
(d) Waiver of inter-company balance by Organic Worldwide Inc (the Parent) (per item (2)(iv) of the meeting notes):
Whether, and if so to what extent, the waiver would be tax effective for Green-HK. If you consider it not tax effective, give suggestions. (4 marks)
(e) Redundancy payment and additional gratuity (per item (3) of the meeting notes):
Whether, and if so how, the redundancy payment and additional gratuity would be tax deductible to Green-HK. If applicable, give an alternative suggestion. (4 marks)
Professional marks will be awarded in question 1 for the appropriateness of the format and presentation of the report and the effectiveness with which its advice is communicated. (4 marks)
2.
Antony and Rebecca are a married couple who are seeking professional tax advice on their tax positions. The following information relates to their affairs for the year ended 31 March 2012:
(1) Antony was previously employed by Mix and Match Ltd, a Hong Kong-listed company. On 1 March 2011, he was offered a lump sum payment of $300,000 to join Modern Home Ltd (MHL), an interior decoration firm resident in Hong Kong, as head designer. On 1 April 2011 he accepted the offer, received the payment and started working for MHL.
(2) His salary with MHL is $100,000 per month. Antony contributed 5% of his total salary to MHL’s Mandatory Provident Fund Scheme; MHL contributed 10% to the Scheme.
(3) Antony received a ‘housing allowance’ of $30,000 per month. However, he only spent $25,000 per month on rent, government rates and management fees associated with his rented flat. His employment contract states that his rental allowance is designed to enable him to afford accommodation in Hong Kong, and that it may be applied by him towards rent or a home purchase. MHL requires Antony to provide a copy of his lease and monthly rental receipts, but has never queried the fact that he does not spend the whole of his housing allowance on accommodation.
(4) MHL provided Antony with a new car (cost $500,000) which he could, and did, use for private (50%) as well as business (50%) purposes. MHL also provided him with a petrol station card taken out in the name of MHL. Antony charged all his expenditure on petrol, totalling $48,000, to this card.
(5) MHL paid a club membership for Antony at the Hong Kong Designers Club. The annual membership fee was $32,000 and the membership was in Antony’s name. Antony regularly used the club for entertaining MHL’s clients. His total entertainment expenditure at the club was $38,000, of which MHL reimbursed him $28,000 upon production of vouchers showing client entertainment and promotion.
(6) Antony received a share option in the year of assessment 2009/10 while he was working for Mix and Match Ltd. Under the terms of his share option, Mix and Match Ltd would either pay him the cash value of his option or provide him with shares. Antony could not insist on receiving shares. The option became exercisable in the year of assessment 2011/12. When Antony exercised his option, Mix and Match Ltd exercised its right to pay cash instead of providing shares; and Antony received $100,000.
(7) After work hours, Antony devoted his time to writing numerous articles on interior design for magazines and newspapers. From this activity, he earned $90,000 in the year 2011/12.
(8) Antony earned $15,000 in royalties in 2011/12 from a book on interior design that he had written the previous year. The publisher who paid him the royalties is based in Singapore, and the book was published and sold only in Singapore.
(9) Rebecca is a housewife. In her spare time, she sells home products to friends on behalf of a Taiwan company. For this purpose, the company sends her a stock of products each month, and Rebecca arranges home parties to which she invites friends and demonstrates the products. She earns a commission of 20% of the gross sales proceeds of the goods she sells on behalf of the company. In the year of assessment 2011/12, Rebecca earned commissions totalling $80,000.
Required:
(a) Advise Antony and Rebecca of their respective tax positions for the year of assessment 2011/12. Support your advice with a computation of Antony’s salaries tax liability. (25 marks)
(b) Advise Rebecca of the compliance obligations, if any, imposed on her under the Inland Revenue Ordinance in respect of her sale of home products on behalf of the Taiwan company. (4 marks)
Section B – TWO questions ONLY to be attempted
3.
(a) Below is the group structure of P Ltd and its subsidiaries:
Under the current structure, P Ltd owns all the shares in A Ltd and B Ltd. A Ltd, in turn, owns all the shares in C Ltd. P Ltd is incorporated in Bermuda. A Ltd, B Ltd and C Ltd are all incorporated in Hong Kong. C Ltd owns a commercial property in Hong Kong, which is mortgaged in favour of the Citibank for an amount of $70 million.
It is proposed to restructure the group in January 2013 as follows:
Step 1: A Ltd will transfer 100% of the shares in C Ltd to B Ltd. The consideration will be $30 million payable to A Ltd, plus another $70 million payable direct to the Citibank on behalf of C Ltd.
Step 2: B Ltd will issue shares equivalent to 10% of its total new shareholdings to an unrelated third party for $4 million. The amount so raised will not be used in Step 1.
Step 3: A Ltd will then be liquidated.
Required:
Explain the stamp duty implications arising from the transfer of the shares in C Ltd (Step 1). Clearly identify any available exemptions and analyse the extent to which these exemptions may be affected by Steps 2 and 3 in the restructuring proposal. (11 marks)
(b) After the restructuring, C Ltd will lease the commercial property to B Ltd for four years. Under the lease agreement, B Ltd will pay C Ltd $50,000 per month plus 3% of B Ltd’s gross turnover each month from the business conducted in the property. The market rental of the property is $80,000 per month.
Required:
Explain the stamp duty implications of this leasing arrangement. (5 marks)
4.
Home Design Inc (HDI) is a US corporation which is engaged in the business of purchasing furniture from factories in Mainland China and reselling them to customers around Asia, including Hong Kong.
HDI has engaged the services of an unrelated buying agent in Hong Kong, Buyer Ltd, to deal with suppliers on its behalf. Buyer Ltd is responsible for negotiating terms (as dictated by HDI) and placing purchase orders with suppliers’ representatives in Hong Kong, performing quality control services, and arranging shipment of the furniture either to HDI in the USA or directly to customers outside the USA according to the directions given by HDI.
In addition, Buyer Ltd maintains a showroom in Hong Kong, which potential customers visit from time to time to view samples. If buyers wish to place orders during such visits, they complete a purchase order form. which Buyer Ltd faxes to HDI’s office in the USA. HDI then follows up with customers out of its office in the USA. Buyer Ltd does not negotiate the terms of such sales. About 20% of all sales are made to customers in Hong Kong.
Required:
(a) Based on the Departmental Interpretation and Practice Note No. 21 entitled ‘Locality of Profits’, explain the practice adopted by the Commissioner of Inland Revenue for determining the source of trading profits. (4 marks)
(b) Discuss whether Home Design Inc’s profits from the trading transactions should be subject to, or exempt from, profits tax. If you consider that the profits are subject to profits tax, advise how Home Design Inc could restructure its activities to ensure that the profits would be exempt from tax. (12 marks)
5.
Auto Ltd is a company incorporated and carrying on business in Hong Kong. Despite continuous profitability since the commencement of its business, in the last year Auto Ltd has experienced a tremendous market downturn and incurred significant accounting losses. The sole shareholder of Auto Ltd, Mr Tan, is a non-Hong Kong resident. He understands that under his tax jurisdiction, tax losses incurred by a corporation can be carried back and applied to offset a corporation’s profits in the preceding year. Moreover, tax losses of a corporation resident in his tax jurisdiction can be transferred to another profitable corporation within the same group.
Required:
(a) Based on the Inland Revenue Ordinance, state the general rules governing the treatment of tax losses for corporations carrying on businesses in Hong Kong, assuming the corporations are not involved in any partnership. (4 marks)
(b) Mr Tan is considering disposing of the shares in Auto Ltd in order to capitalise the tax benefit arising from the tax losses carried forward by Auto Ltd.
Required:
Advise Mr Tan on the Hong Kong tax implications arising from the share disposal for the ability of Auto Ltd to carry forward its tax losses. (6 marks)
(c) If he does not sell the shares in Auto Ltd, Mr Tan intends to make a loan to Auto Ltd with interest in order to finance the company’s future operations.
Required:
Advise Mr Tan on the Hong Kong tax implications to Auto Ltd in respect of the interest incurred on this loan as currently proposed and, if appropriate, suggest a structure which will ensure that the loan interest will be deductible.
Note: You may assume that Mr Tan is not carrying on a money lending business when and by virtue of making the loan. (6 marks)
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