Question 2a ii
You are a manager in Lapwing & Co. One of your audit clients is Hawk Co which operates commercial real estate properties typically comprising several floors of retail units and leisure facilities such as cinemas and health clubs, which are rented out to provide rental income.
Your firm has just been approached to provide an additional engagement for Hawk Co, to review and provide a report on the company’s business plan, including forecast financial statements for the 12-month period to 31 May 2013.
Hawk Co is in the process of negotiating a new bank loan of $30 million and the report on the business plan is at the request of the bank. It is anticipated that the loan would be advanced in August 2012 and would carry an interest rate of 4%.
The report would be provided by your firm’s business advisory department and a second partner review will be conducted which will reduce any threat to objectivity to an acceptable level.
Extracts from the forecast financial statements included in the business plan are given below:
Statement of comprehensive income (extract)
| note | forecast 12 months to 31 may 2013 $'000 | unaudited 12 months to 31 may 2012 $'000 | |
| revenue | 25000 | 20600 | |
| operating expenses | -16550 | -14420 | |
| ---------- | ---------- | ||
| operating profit | 8450 | 6180 | |
| profit on disposal of beak retail | 1 | 4720 | ---- |
| finance cost | -2650 | -1690 | |
| ---------- | ---------- | ||
| profit before tax | 10520 | 4490 | |
| ======= | ======= | ||
| statement of financial position | |||
| note | forecast 31 may 2013 $'000 | unaudited 31 may 2012 $'000 | |
| assets | |||
| non-current assets | |||
| property plant and equipment | 2 | 330150 | 293000 |
| current assets | |||
| inventory | 500 | 450 | |
| receivables | 3600 | 3300 | |
| cash and cash equivalent | 2250 | 3750 | |
| ---------- | ---------- | ||
| 6350 | 7500 | ||
| ---------- | ---------- | ||
| total assets | 336500 | 300500 | |
| ======= | ======= | ||
| equity and liabilities | |||
| equity | |||
| share capital | 105000 | 100000 | |
| retained earnings | 93400 | 92600 | |
| ---------- | ---------- | ||
| total equity | 198400 | 192600 | |
| ---------- | ---------- | ||
| non-current liabilities | |||
| long term borrowings | 2 | 82500 | 52500 |
| deferred tax | 50000 | 50000 | |
| current liabilities | |||
| trade payables | 5600 | 5400 | |
| ---------- | ---------- | ||
| total liabilities | 138100 | 107900 | |
| ---------- | ---------- | ||
| total equity and liabilities | 336500 | 300500 | |
| ======= | ======= |
Notes:
1. Beak Retail is a retail park which is underperforming. Its sale is currently being negotiated, and is expected to take place in September 2012.
2. Hawk Co is planning to invest the cash raised from the bank loan in a new retail and leisure park which is being developed jointly with another company, Kestrel Co.
Required:
In respect of the engagement to provide a report on Hawk Co’s business plan:
Recommend the procedures that should be performed in order to examine and report on the forecast financial statements of Hawk Co for the year to 31 May 2013. (13 marks)