Abacus Company Limited

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