PM065: Accounting & Finance- Glasgow International College- Case Study Assignment Help

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Case Study Assignment Help:

Task:

TR ltd’s is a growing UK based firm of Chartered Accountants, Business Advisors and Personal Financial Advisors. It has offices in several out-of- town UK locations. These are leased premises. At a recent board meeting, the Directors decided it is high time the company reviewed this accommodation. This will fit in with its aims of continuing to attract new clients, retain existing clients and extend its range of services in order to increase profits. Several other factors are influencing this change in the Property Management of the business.

One key consideration in considering future business premises is an imminent change in accounting regulations. Lease costs will soon need to be reflected in non-current assets and this may have an effect on key financial indicators. Also, whilst the costs involved with the current set-up are continually increasing, Directors feel they have poor quality accommodation in return and that this is not providing an incentive to retain valued staff and clients. In addition, employees are increasingly requesting more flexible working conditions including a shorter commute.

Directors are aware that changes in technology mean that working from home at least part of the time is becoming more viable and that competitor firms are beginning to offer this option to their staff. Further, some clients are changing the way they interact with TR ltd, for instance by increasingly using remote computing software. However, TR ltd’s Directors agree it is also vital that the firm maintains stability in operations. It is also very important that clients are able to visit key staff in attractive, fit-for purpose offices. They are keen that any move minimises disruption to staff.

The Property and Finance Directors have been charged with collecting information about alternative accommodation and have come up with two proposals.

Option 1: Purchase of offices
This Option will require the purchase of new offices including fixtures and fittings and office furniture. It is anticipated that an initial investment of £9.5m will be required. Business Rates will exceed current levels by £3.5m in the first year. In addition, further property costs in excess of current levels would be incurred. In the first year,
these would total around £2.5m. This would include for instance property maintenance, insurance and cleaning expenditure. These property costs (excluding the Business Rates) would increase by 10% for the first 3 years. With this Option, TR ltd will require a huge initial outlay which necessitates recourse to external sources for funding.

Option 2: Renting serviced offices
The second Option will be to obtain office space by renting out serviced office space. Quotations for this Option have been obtained and include a £8.5m serviced rental fee for the first year. This includes for instance all the property costs mentioned for Option 1, security costs, rent of the space and Business Rates. It is estimated that this fee will increase by 2% per annum for the first 3 years. This increase takes account of various factors. For instance, the rental agreement will state that an increase in TR’s fee income results in a proportionate rise in certain elements of the
serviced rental charge. This is offset for example against a fall in rental costs once the rental agreement is underway. TR considers that this option may allow it to adapt to changes in the business environment.

TR ltd has confirmed with its esteemed professional advisors that Option 2 serviced office rental payments would be treated as annual expenditure in the Income Statement under the new International Accounting Standard on leasing, IAS17.

Additional notes
The Finance Director estimates that additional client fee income will be in the region of £10m per year (this represents additional sales less direct costs) for the first two years and should increase by 5% in the third year and 10% in the fourth year. TR agrees that they will need to have a clear strategy for communicating premises and any associated business changes to clients. There will also be significant legal and removal costs associated with each Option. It is estimated that such initial costs will total £825,000.

The initial investment will be undertaken in 2018. TR intends to comprehensively review its accommodation again after 8 years.

If Option 1 is chosen, new finance must be raised for the initial outlay. The most likely method would be a three-year loan. The interest rate payable on the debt is 11 per cent per annum, with interest payable every 6 months with the first instalment due on 30 th June 2019.

TR hopes that fresh premises will give it the momentum to further publicise its growing business through advertising. In turn this should help to boost client fee income. It is anticipated that additional associated advertising costs will be 2.5% of sales per annum.

Requirement:
You are required to assist the financial Director in evaluating the proposals and make a recommendation to the Board of Directors of TR ltd on the most appropriate course of action to follow, taking into account any other relevant financial or non-financial factors. At this stage only one of the Options should be recommended.

Your analysis should commence with an appraisal of these proposals using appropriate investment appraisal techniques. It should also include an assessment of the current financial performance and strength of the business and an evaluation of the impact of each proposal on the company’s financial ratios and overall business position. You may wish to mention any additional information which would aid the decision. Your analysis should be presented in
the form of a report and you should amplify your answers by incorporating suitable charts, graphs and appendices. You should clearly state any assumptions that you make and all sources used should be cited.

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Posted on : March 21st, 2018
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