Guidance to using this document

This document has three elements:

The examiner’s comments

This is a review of the performance of students overall in this examination.
The examiner explains:
- What key issues students should have picked up from both the AI and the Exam
Paper. Did you identify and use these?
- Which skills were performed well and badly?
- Why students passed and other students failed in this exam? You need to be
able to avoid the mistakes that the failing students have made.

The marking key

This is what your script will be marked against. You should be able to use this
document to do a number of things:
- Examine the types of issues that the examiner was expecting to see in scripts in
areas such as wider context, judgement and recommendations. You may be able
to use these ideas to generate similar issues in future examinations.
- Determine the level of detail that was expected for the appendices. Were exact
figures required (in bold) or were you simply expected to discuss the issues in
more general terms?
- You could use this marking key to mar either your own script or the illustrative
script in order to determine exactly how and why some points score or do not
score on the marking key.
- Remember that there are more points in the marking key than even the very best
students would manage to achieve in the exam time. So do not become overly
concerned if it contains many issues that you have not considered but instead
use it to determine where you could easily add one or two more points in your
weaker skills in order to vastly improve your mark.

An illustrative script
This is a real script submitted by a top quartile student on the day of the real exam.
You can use this to:
- Determine how a top quartile student writes, provided appendices, makes
recommendations etc.
- Read it alongside the examiner’s commentary which will point out the scripts
strengths and weaknesses. Try to determine how you could replicate the
strengths and overcome the weaknesses.

Please Note: This exam was set before the introduction of a pre-populated
spreadsheet. Comments should be reviewed in the light of this and the
illustrative script contains appendices that go beyond that currently required.
 CASE STUDY – JULY 2022
EXAMINERS’ COMMENTS

Contents

PART 1: EXECUTIVE SUMMARY ............................................................................................................................2

Introduction ............................................................................................................................................................2
Overview of performance ......................................................................................................................................2
Review of professional skills .................................................................................................................................2
Review of requirements .........................................................................................................................................3
PART 2: THE CASE STUDY EXAMINATION ...........................................................................................................4
Scenario for the paper (Advance Information) ......................................................................................................4
Analysis of Advance Information (AI) ....................................................................................................................4
Information provided in the Case Study Exam (CSE) .........................................................................................11
Exam requirements ..............................................................................................................................................11
Analysis of Case Study Exam information ...........................................................................................................12
Summary of grades available ..............................................................................................................................13
PART 3: COMMENTARY ON CANDIDATES’ PERFORMANCE ...........................................................................14
Overview of professional skills ............................................................................................................................14
Overall Assessment Criteria (OAC) .....................................................................................................................15
Executive summary .............................................................................................................................................16
Requirement 1: Review of FFL’s financial performance .....................................................................................16
Requirement 2: Renewal of Clown House licensing arrangement ......................................................................16
Requirement 3: Proposed purchase of heritage games .....................................................................................17
PART 4: APPENDICES ...........................................................................................................................................18
APPENDIX 1: FINANCIAL STATEMENT ANALYSIS: FFL’s financial performance ..........................................18
APPENDIX 2: FINANCIAL DATA ANALYSIS: Calculation of licence fees payable (£000) ................................20
APPENDIX 3: COMMERCIAL DATA ANALYSIS: Calculation of maximum price payable ................................21
PART 5: MARKING KEY

© The ICAEW 2022 Page 1 of 21

 CASE STUDY – JULY 2022
PART 1: EXECUTIVE SUMMARY

Introduction

This report covers the July 2022 Case Study (CS) exam. It is issued in conjunction with two sample answers and
related Examiners’ commentaries. The first of these was near the top of all assessed scripts; the second failed the
exam. In reviewing these documents, it is important to be aware that it is rare for a script to be uniformly ‘bad’ or
uniformly ‘good’: a successful script will often present detailed coverage of all requirements but include errors of
calculation, spelling or logic; an unsuccessful script may contain one or two strong sections or several excellent
points but be let down by poor / incomplete text elsewhere. Unsuccessful candidates will also find helpful guidance
in the ICAEW Learning Materials. Attached to this report are three appendices giving examples of the sort of
analysis that candidates did or might have done. The two sample answers offer further insights into this area.

Overview of performance

The pass rate was 81.4%, building on the improvement seen in the 2021 sittings (November 2021 – 80.4%; July
2021 - 84.4%), and demonstrating continued improvement in performance. Candidates again made good use of
the spreadsheet functionality, enabling them to complete their calculations efficiently and effectively and thus
have more time for the discussion sections. Calculations were, however, not universally accurate or clear: there
were numerous instances of computational errors. For example, in Requirement 2, it was often not obvious what
the final fee figures were because candidates were ambiguous in their treatment of the minimum fee clause. The
best scripts were methodical, well-balanced and relevant, answering each element of each requirement (the new
structure with separate tasks being shown as discrete bullet points generally seems to have been welcomed) and
containing high-quality financial analysis; sound judgement; commercial recommendations; and succinct, focused
executive summaries. Good candidates could assimilate the case material into a report, displaying business
awareness and appropriate professional scepticism. They had clearly prepared well, making the necessary effort
not only to master the AI but also to hone their exam technique and to practise using the new software.

The subject of the case is Fab Fun Limited (FFL), a company based in Cambridge in the East of England. FFL
designs, develops, distributes and sells board games (some under licence) and jigsaw puzzles, both to retailers
throughout the UK and directly to consumers through its website. Its manufacturing operations are outsourced. The
candidate is in the role of Abie Cheng, a final-year trainee ICAEW Chartered Accountant based in the business
advisory unit at ZN Chartered Accountants, a firm of ICAEW Chartered Accountants in Cambridge, reporting to
Oswald Perrin, a partner in ZN’s business advisory unit.

The exam requirements comprised:

1. A review of FFL’s performance for the year ended 30 June 2022 in comparison with 2021, covering revenue for
each product group individually, for each sales channel individually and in total; gross profit for each product
group individually and in total; and operating profit in total. There was also a request to advise FFL on an issue of
faulty products from one new supplier.
2. An evaluation of the proposed renewal of the Clown House licence agreement. Candidates had to calculate, for
two fee payment versions, both on a normal basis and on an alternative basis (six-month delay in release of the
associated film), the licence fee payable over a two-year period. They had to evaluate the appropriateness of the
assumptions provided and the implications of the six-month delay; assess the commercial issues for FFL; and
recommend, with reasons, which version FFL should accept.
3. An evaluation of the approach from Yolki Games (YG) to sell two heritage board games, Yek and Gip, to FFL.
Candidates had to calculate the maximum price that FFL should pay YG for Yek and Gip; evaluate the financial,
operational and strategic issues that FFL should consider when deciding whether to buy them, incorporating any
ethical and business trust aspects; and advise FFL, with reasons, on how to respond to the approach from YG.

Requirement 1 was very strong. The marks profile for Requirement 3 was fractionally better than for Requirement 2.
Marks for the Executive Summary (ES) were also up on norms, evidencing inter alia better planning (often, poorer
candidates don’t leave enough time to complete the ES). The quality of weaker candidates’ answers, especially in
the skill of Applying Judgement, was similar to the Examiners’ past experience. Similarly, recommendations were
characterised by an inability, for all three requirements, to offer appropriate, commercial advice based on their work.

Review of professional skills

Assimilating and Using Information (A&UI): A&UI was a strong skill on this exam, reflecting appropriate, well-
labelled appendices in Requirements 1 and 2 that exploited the software’s spreadsheet functionality. Many
achieved passing grades in Requirement 1 by segmenting heritage/licensed board games revenue into the
named games/licensors. Fewer worked out average revenue per product group: this impaired their subsequent
analysis. For Requirement 2, most produced relevant fee calculations, enabling them to go on to consider the
relative merits of the two versions. Notable here was the number of candidates who prepared sensitivity analysis
and/or a payment schedule. Requirement 3 appendices were less good, with a variety of errors. An encouraging

© The ICAEW 2022 Page 2 of 21

 CASE STUDY – JULY 2022
number of candidates did, however, carry out some sensitivity/scenario analysis here too, for example by using a
different cost of sales adjustment. Box 3 for each requirement was basic context required for a full appreciation of
the scenario. Candidates who articulated their familiarity with FFL and its industry did best here.

Structuring Problems and Solutions (SP&S): Candidates generally – but by no means universally – displayed
good SP&S skills. The majority obtained passing grades in all three boxes at Requirement 1. Some omitted
analysis of unit sales volumes (box 1) or failed to follow (box 3) the requirement wording specifically mentioning
Huppi, retailers and consumers. At Requirement 2, many candidates missed passing grades for boxes 1 and 2
by not preparing full calculations to show the fee in the event of a film delay, or overlooking the minimum fee
clause. Most candidates did discuss some assumptions, but only a minority really mastered the key issues. In
Requirement 3, candidates did well on boxes 1 (calculation of maximum price) and 3 (ethical and business trust
issues), but not on box 2 (operational and strategic issues). Those scoring less well typically made basic errors.
Despite good number-work, they were then often unable to stand back and reflect on the implications of the
figures they were using. Most identified the key ethical aspects of the scenario.

Applying Judgement (AJ): AJ was again the weakest skill, though overall stronger than usual (especially in
Requirement 1). At Requirement 1, candidates had to evaluate their work on revenue (box 1), GP/OP (box 2) and
Huppi (box 3). Average marks were high for all three. In box 1, the best candidates rationalised the results of the
new game launches and their relative impact on revenue. Costs and profit produced some good discussion, eg,
linking higher distribution costs to the changed retailer/online mix. For Requirement 2, boxes 1 and 2 (evaluating
fee calculations, assumptions and the film delay) were disappointing: many did not develop their number-work.
Box 3 (evaluation of commercial issues) was better but barely half of candidates achieved passing grades. For
Requirement 3, box 2 (operational and strategic impact) was poor, a function of earlier weak analysis. For box 1,
too many took the figures at face value. For box 3, the ethical and business trust issues were not well evaluated.

Conclusions and Recommendations (C&R): Candidates did better on Conclusions than Recommendations. For
Requirement 1, virtually all candidates concluded on all elements of their financial analysis, but recommendations
did not always follow logically from their foregoing work. For Requirement 2, marks were variable, with fewer than
half of candidates obtaining a CC grade for what should have been a straightforward Conclusions box. Some did
not come to a decision about which version of the fees FFL should accept, even though asked to reach one.
Recommendations were patchy: many candidates missed the obvious need to discuss some of the fundamental
issues (eg, exclusivity) with CH itself. Requirement 3 was similar. Candidates generally concluded on the key
points but, again, some did not provide a response despite being asked for one; others missed out on the first
bullet by suggesting a maximum price above that offered by Yolki – though some did then appreciate that this
was unusual and made attempts to explain it.

Review of requirements

Requirement 1: Most candidates produced high-quality analysis of the main numbers. Lower grades were usually
for not exploring the named licensors/games, sales volumes or revenue per product type. The issues in Exhibit 16
should have been familiar from the AI, but dissecting them required careful thought. In practice, relatively few
candidates covered all the revenue and cost implications of the three new games. In dealing with the defective
jigsaws, candidates were required to advise FFL on its actions towards three parties – Huppi, retailers and
consumers. Better candidates made links to three of the ten risks that it had identified (Exhibit 12), in relation to
suppliers; inventory and returns; and safety – all very relevant to the situation in which FFL now found itself. They
also understood the challenge of doing the right thing for the growing number of individual online customers.

Requirement 2: Candidates on average performed slightly worse here than for recent sittings. Many displayed poor
AJ skills; weaker ones limited their SP&S marks by getting tangled up in their calculations, especially for the licence
fee in the event of a delayed film release. Despite the Exhibit 11 template, a wide range of layouts was in evidence,
some calculations covering the electronic equivalent of an Amazonian rainforest. A common failing was not dealing
correctly with the minimum fee clause. Better candidates went on to rework their figures under different scenarios,
eg, using FFL’s existing licence fee norms, to see how this would affect the decision. Many struggled to use their
higher skills, eg, not working through all the ramifications of the possible lost exclusivity. Coverage of the extension
of the contract to jigsaws was also often brief.

Requirement 3: On this occasion, the marks profile was higher than that for Requirement 2 – though only just.
Candidates who followed the calculation template in Exhibit 9 generally achieved good AU&I and SP&S marks.
They went on to reflect on the bigger picture, offering sensible judgements, with focused conclusions and
recommendations. They looked at the key issues (such as the various aspects of the existing manufacturing
arrangements) holistically rather than one-dimensionally. Others made simple errors, eg, applying the £1 increment
to both games. As tends to be the case, candidates identified ethical / business trust issues adequately but were
less good at evaluating them.

In summary, the FFL case dealt with an understandable and topical industry, with an appropriate level of
numerical content for students on the verge of qualifying as ICAEW Chartered Accountants. Candidates were
able to demonstrate a very high level of competency in meeting the requirements.
© The ICAEW 2022 Page 3 of 21
 CASE STUDY – JULY 2022
PART 2: THE CASE STUDY EXAMINATION

Scenario for the paper (Advance Information)

The case relates to Fab Fun Limited (FFL), a company based at a business park in Cambridge. FFL designs,
develops, distributes and sells board games (some under licence) and jigsaw puzzles, both to retailers throughout
the UK and directly to consumers through its website. Its manufacturing operations are outsourced. You report to
Oswald Perrin, a partner in the business advisory unit. Revenue for 2021 was just over £70 million, a new peak.

Prior to the examination, candidates were provided with a package of information, containing a series of exhibits
relating to FFL and the industry, comprising:

1 About you (Abie Cheng), your employer (ZN Chartered Accountants) and your client (Fab Fun Limited)
2 The UK traditional toys and games industry: An introduction
3 Fab Fun Limited (FFL): An introduction
4 FFL: Review of the management accounts for the three years ended 30 June 2021
5 FFL: Management accounts for the three years ended 30 June 2021
6 FFL: Business model and processes
7 FFL: Customer profiles
8 FFL: Product development and marketing
9 FFL: Game purchase – Lampho
10 FFL: Supply chain and manufacturing
11 FFL: Licensing arrangements
12 FFL: Strategic summary
13 Toy safety
14 Recent media coverage

Analysis of Advance Information (AI)

By carefully studying and analysing the 38 pages of the AI, candidates should have formed a detailed picture of
FFL and the industry, using facts and figures from across the material. Candidates should be aware of the main
contents so that they can easily locate key topics in the exam. Key points are summarised below. (Additional
Examiners’ commentary is given in this font, highlighting links between exhibits.)

Exhibit 1 introduces the role of the candidate, Abie Cheng. The exhibit identifies the work undertaken by Abie,
notably including ‘sensitivity analysis, scenario analysis and other numerical techniques’.

Exhibit 2 explains that:

x The traditional toys and games industry generates annual sales of around £3 billion and comprises a wide
range of products. Over a quarter are aimed at adults, notably board games and jigsaws.
x Some games are licensed from entertainment brand owners; other are adapted, eg, to be suitable for children.
x In recent years, many new games have appeared and digital versions have become common.
x Business is highly seasonal: 50% of sales are made in November/December.
x Toys and games are heavily inspired by TV/film. Thousands are launched every year but few really endure.
x Demand is influenced by socio-economic factors. UK industry revenue is expected to drop by 4% in 2021-22
after recent annual growth of 5%, but board games and jigsaws have benefited from increased leisure time
(10-20% of consumers bought a board game for the first time in 2020-21) and the popularity of 3D jigsaws.
x Toys and games have traditionally been sold through a variety of retailers, but one-third are now sold online.
x Many companies manufacture outside the UK, on-site or outsourced, and many use specialist distributors.
x Buyers increasingly care whether products fit their cultural/social values, eg, sustainability.

Exhibit 2 provides the context in which the remaining case material can be understood.

Exhibit 3 summarises the key features of FFL’s business:

x Incorporated in 1983, FFL designs, develops, distributes and sells board games and jigsaw puzzles.
x It has steadily released new games since then, with some winning awards. The first jigsaws were sold in 2006.
x It has also bought games (eg, Lampho) from other companies.
x The first FFL apps (mostly free to use) for smartphones and handheld devices were launched in 2015.
x Its business customers, all in the UK, comprise both specialist toys and games stores and generalist retailers.
x FFL also sells direct to consumers, both in the UK and internationally, through its online store.
x Revenue in the year ended 30 June 2021 was just over £70 million, representing around 3.7 million units.
x Around 60% of annual sales take place in the October-December quarter.
x Some products feature popular entertainment brands, licensed from the respective brand owners.

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 CASE STUDY – JULY 2022
x FFL’s portfolio is divided into three product groups: heritage board games, licensed board games, jigsaws.
x FFL is based in Cambridge. It also has four distribution warehouses. It outsources its manufacturing.
x The directors are: Benedict Rossi (CEO); Olivia Sarna (Finance and Licensing); Annabella Connor (Sales, New
Business); Raj Kambli (Purchasing, Inventory, Sustainability); and Dan Heydon (Design, Development, IT).
x FFL prides itself on seven ‘pillars’, known collectively as SUCCESS.
x FFL sets a Manufacturer’s Suggested Retail Price (MSRP) – the price recommended for retailers to sell to end-
consumers. Retailers buy from FFL at an average discount of 25% on MSRP. All online sales are at MSRP.
x There are three main competitors, all of broadly the same financial size as FFL: Yolki, Bonanza and Hamlin.

This sets the scene for Exhibits 4 (business review) and 5 (June 2021 management accounts, with 2019 and 2020
comparatives). The analysis below is a synthesis of these two exhibits, together with some additional calculations
based on their contents. It should be readily apparent that the two documents are to be reviewed in conjunction with
each other; looking at either of them in isolation would tell only part of the financial story. Exhibit 4 includes some
graphs to reinforce the textual and tabular information. Candidates should quickly appreciate that FFL’s results are
segmented in two ways (by product group and by sales channel) and that they need to analyse them on this basis.
(Note: Although the earliest year presented is 2019, it is possible to reconstruct the overall picture and some detail
for 2018 from the 2019 statement of cashflows and from the accounts commentary.)

Statement of profit or loss – revenue and sales volumes

x After rising by 7.5% to £61,956k in 2019 and 4.5% to £64,749k in 2020, total revenue grew by a further 9.5% in
2021, to reach £70,897k. This compares with the target of £75 million (Exhibit 12).
x Revenue for the three product groups has moved in different ways (an accompanying graph allows readers to
observe these trends at a glance):
o Heritage board games (H), up by 1.5% to £32,015k (2019), by 3.9% to £33,276k (2020) and by 1.3%
to £33,721k (2021).
o Licensed board games (L), up by 21.1% to £18,224k (2019), down by 2.7% to £17,739k, then back up
by 25.1% to £22,198k (2021).
o Jigsaws (J), up by 6.4% to £11,717k (2019), by 17.2% to £13,734k and by 9.1% to £14,978k (2021).
x H continues to represent the largest group, but its share of total revenue fell to below half, from 51.7% in 2019
to 47.6% in 2021, with L and J correspondingly increasing their shares.
x Sales volumes have increased by 6.7% from 3,209k (2019) to 3,423k (2020) and by 8.6% to 3,717k (2021).
Again, the nature of the change has varied between the product groups, not entirely the same as for revenue:
o H: up by 3.9% from 1,342k (2019) to £1,394k (2020) and by 1.3% to £1,426k (2021).
o L: down by 0.4% from 729k to 726k, then back up by 20.5% to 875k (2021).
o J: up by 14.5% from 1,138k (2019) to 1,303k (2020) and by 8.7% to 1,416k (2021).
x In volume mix terms, H and J are therefore almost equal in size at around 38%, with L on 23%.
x These figures enable a calculation of average revenue per product group and in total (£000):
o H: up 0.1% from £23.86 (2019) to £23.87 (2020), down 0.9% to £23.65 (2021).
o L: down 2.3% from £25.00 (2019) to £24.43 (2020) and back up 3.8% to £25.37 (2021).
o J: up 2.4% from £10.30 (2019) to £10.54 (2020) and 0.4% to £10.58 (2021).
x Various factors affect these numbers, as the 2019 commentary notes: ‘With online sales being at higher
prices, average revenue per unit has increased, though this varies between product groups because of the
mix of products and range of price points within each.’
x For two product groups (H and L), information is provided about the main games/licensors, so a further level
of analysis can be done. (There are too many varieties of jigsaw for an equivalent exercise on J to be helpful.)
o For H, three separate games are highlighted. Revenue from two of these (Mucho and Lampho) has
been on steady decline since 2019, while the third (Zyx) increased in 2020 but dipped in 2021. The
catch-all category, ‘Other’, has registered a steady growth over the same period, now accounting for
over 50% of total H revenue. Thus FFL is becoming less dependent on its three core heritage games
– but it should also be worried that these are on a downward curve, especially Lampho, which it
bought in 2016 (see Exhibit 9) and which met its forecasts for the first three years after purchase but
has since slowed alarmingly: revenue is down from almost £5 million in 2019 to less than £4 million in
2021.
o Of the three licensors separately identified, one (Mondo) was signed with effect from 1 July 2020, so
there is no three-year record of performance. Nonetheless, its first year was very strong, with revenue
of £4,319k, making it the second-largest contributor to L revenue. The Mondo games are priced high,
helping to explain the increase in L’s average revenue for 2021. The other two licensors (Ringover
and Clown House [CH]) have shown revenue growth from 2019 to 2021. The CH licence began in
2019, when it was ‘seen as a key driver of future growth’. Revenue from ‘other’ licensors has fallen,
from £12,634k to £10,665k: they now account for under 50% of total L revenue. These figures should
be assessed in light of the later detail on each licence at Exhibit 11. The dip in 2020 was due to the
growth in heritage games (‘cheaper, so an easier purchase for consumers with reducing disposable
income’).

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 CASE STUDY – JULY 2022
x Revenue is also reported by sales channel (but note that COS/GP are not). The figures here show a rapid
trend away from retailers, with online’s share more than doubling from 18.1% in 2019 to 36.3% in 2021. This
trend, which was already underway, really took off ‘in the three months to June [2020], when online buying
became much more widespread for consumer products generally.’
x In absolute terms, online now (2021) accounts for £25,706k of revenue, up from £11,231k in 2019, while
revenue from retailers has fallen in the same period from £50,725k to £45,191k. However, FFL’s still values
its retailer channel (‘despite the downward trend, we still view this sales channel as important, not least
because of the profile that it gives to our products’ – 2021).
x It is reported elsewhere (Exhibit 6) that IT systems will need upgrading if online revenue reaches £40 million:
this landmark may not be too far in the future if the recent rate of progress continues.

Statement of profit or loss – cost of sales (COS), gross profit (GP) and gross profit margin (GP%)

x COS went up by 5,5% from £46,656k (2019) to £49,211k (2020) and 10.3% to £54,300k (2021).
x The changes can be broken down by product group as follows:
o H: up 5.1% from £22,203 (2019), to £23,338k (2020) and by 2.1% to £23,819k (2021).
o L: down by 1.6% from £15,099k (2019) to £14,850k (2020), back up by 25.2% to £18,591k (2021).
o J: up by 17.8% from £9,354k (2019) to £11,023k, and by 7.9% to £11,890k (2021).
x They can also be analysed by cost category:
o Manufacturing and production constitute by far the largest component of COS, at around 90%, and
thus COS and GP are particularly sensitive to changes in this area. In 2020, they were up by 5.6%
from £41,724k in 2019 to £44,057k in 2020 and by 10.1% to £48,504k in 2021.
o Head office overheads were up by 6.7% from £2,878k (2019) to £3,071k (2020) and by 7.4% to
£3,299k (2021).
o Licence fees are the smallest part of COS – but they offer the most scope for analysis as they are
attributed to a single revenue stream (L). Movements should therefore be analysed by reference to
changes in L revenue. Licence fees were up by 1.4% from £2,054k (2019) to £2,083k (2020) and by
19.9% to £2,497k (2021).
x As a result of the changes in revenue and COS, overall GP is up overall by 4.9% to £15,300k (2019), by 1.6% to
£15,538k (2020) and by 6.8% to £16,597k (2021). Changes in individual product groups are as follows:
o H: up by 1.3% from £9,812k (2019) to £9,938k (2020), down by 0.4% to £9,902k (2021).
o L: down by 7.6% from £3,125k (2019) to £2,889k (2020), up by 24.9% to £3,607k (2021).
o J: up by 14.7% from £2,363k (2019) to £2,711k (2020) and by 13.9% to £3,088k (2021).
x GP% has fluctuated, from 25.3% in 2018 to 24.7% in 2019, 24.0% in 2020 and back up to 23.4% in 2021. Once
again, it is instructive to break this down by product group – in all cases, it can be seen that there was a dip in
2020 and recovery in 2021:
o H: 30.6% (2019), 29.9% (2020), 29.4% (2021)
o L: 17.1% (2019), 16.3% (2020), 16.2% (2021)
o J: 20.2% (2019), 19.7% (2020), 20.6% (2021)
x These figures highlight the very different margins earned by the three product groups. L’s is the lowest because
of the licence fees, which typically represent more than 10% of COS within L; while margins on J are also on the
lower side.
x The accounts commentary ascribes the fall in 2019 to higher production costs for H, offset by the beneficial
renegotiation of a licence agreement) and the appointment of a cheaper manufacturer for jigsaws (the
problematic PZ that appears in Exhibit 10).
x For 2020, the further margin decline was due to higher discounts to some retailers (‘with the move towards online
we did not meet the minimum sales targets’); and suffering the costs of replacing plastic counters with wooden
ones in some games (see Exhibit 8).
x In 2021, the continuing fall was a wider industry issue, but ‘because they are at higher prices, our online sales
achieve a higher margin than our sales to retailers, so the fact that the overall margin is falling does cause
concern’. Reasons were higher production costs; difficulties with PZ; price pressures from large retailers, with a
small increase to 25.5% in the average discount; and higher sales of licensed games.

Statement of profit or loss – distribution costs, administrative expenses and operating profit

x Distribution costs comprise a single line in the statement of profit or loss. Viewed as a percentage of revenue,
they have gone up gradually, from 3.9% in 2019 to 4.0% in 2020 and 4.2% in 2021. Among other things, this
reflects the growth in online sales, which typically involve more, lower-value transactions; though, as noted in
the 2020 commentary, ‘the impact on margin was partly offset by delivery charges for online transactions
below the free delivery thresholds’. The 2021 narrative adds: ‘We may need to increase the delivery charges
payable by these customers if the order value is below a specified level.’
x Administrative expenses in total have risen by 8.8% to £10,393k (2020) and by 11.9% to £11,633k (2021). As
a share of revenue, they have gone up steadily from 15.4% (2019) to 16.1% (2020 and (16.4% (2021). All
four lines elements have increased, at varying rates:
o General administration: up 8.5% to £5,055k (2020) and by 10.7% to £5,594k (2021). Part of this was
the result of pay rises in both 2020 and 2021.

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 CASE STUDY – JULY 2022
o Premises, IT and facilities: up by 6.8% to £1,126k (2020) and by 15.2% to £1,297k (2021).
o Promotion: up by 22.5% to £1,673k (2020) and by 18.2% to £1,978k (2021). For 2019 spend on games
under the new CH licence was £172k (2018 pre-launch period: £66k).
The increase in 2020 was due to spend on a new licence (Mondo), with further spend of £200k in 2021.
o Product design and development (PDD): up by 15.1% to £2,471k (2019), by 2.8% to £2,539k (2020),
by 8.9% to £2,764k (2021). FFL monitors PDD as a percentage of revenue: over the review period, it
has remained relatively static at around the 4% target. The higher costs for 2021 reflect spend on the
Mondo game, other planned new 2022 releases, and some games abandoned during development.
x Net finance income/expense (interest) reflects the fact that cash balances have been positive throughout the
period under review, but with significant in-year fluctuations.
x With all the changes at gross profit level, in distribution costs and administrative expenses, operating profit is
down sharply, from £3,337k (5.4% margin) in 2019 to £2,554k (3.9%) in 2020 and £2,005k (2.8%) in 2021. It is
half of the 2018 figure despite revenue having gone up by more than 20% in that time. It remains to be seen
whether this decline will continue: if it does, it will place severe pressure on the annual £1 million dividend.

Statements of financial position and cash flows

The statements of financial position and cash flow are straightforward to understand.

x PPE is not broken down but note 3 summarises its component parts and depreciation terms (3 to 20 years).
Capex was £223k in 2019, £847k in 2020 and £405k in 2021, with modest disposals at minimal gain/loss in the
period. Depreciation has been £239k, £316k and £302k. The overall impact has been an approximate doubling of
the carrying amount from £601k in 2019 to £1,174k in 2021. Notable changes have been IT improvements and
vehicle purchases.
x Inventories have steadily risen over the period, from £4,750k (2019) to £5,261k (2020) and £5,693k (2021).
Inventory days can be shown to have been reasonable consistent at 41-44 days (using manufacturing and
production costs as the denominator).
x Trade receivables are by far the largest component of receivables: £7,501k (2019), £7,773k (2020), £8,292k
(2021), compared with other receivables and prepayments (around £2 million). No detail is given for the
latter but they will include upfront licence fees, which can be individually significant.
x Trade receivables days can be calculated as 44.2 (2019), 43.8 (2020) and 42.7 (2021). However, these
figures are of limited meaning since they are a hybrid of retailers (payment terms of 30-60 days) and online
customers, most of whose payments are received very quickly (see Exhibit 6 below). Using the assumption
that online sales are consistently settled in an average of 5 days, receivables for retailers would be 52.9
(2019), 56.6 (2020) and 64.1 (2021). The commentary warns of possible future customer problems.
x The majority of payables are trade balances, mainly amounts due to product suppliers (Exhibit 10): £4,735k
(2019), £4,872k (2020), £5,835k (2021). When measured by reference to manufacturing and production
COS, trade payables days have been fairly constant at 41-44 days over the period.
x No information is given about other payables, accruals and provisions, but they will include the normal items
for ongoing expenditure and payroll liabilities. They have moved steadily over the period – £1,270k (2019),
£1,352k (2019), £1,438k (2021) – and do not merit any special attention.
x The statement of cash flows should be read in conjunction with the quarterly cash graph. It shows that for all
three years, net inflow is considerably lower than profit before tax. The overall movement in working capital is
negative in each case, and this is then exacerbated by the effects of tax, capex and dividends. For each of 2020
and 2021, the inflow is less than £200k on profits of over £2 million.
o For 2020, the main cause was £847k of PPE additions after several years of minimal capex spend.
mainly enhancements to online systems and vehicle purchases to service the growth in distribution.
o For 2021, it dipped alarmingly in the run-up to Christmas: ‘… having to pay suppliers before receiving
payment from some key customers, and we nearly needed to use our overdraft facility …’.
x These modest movements have helped maintain a strong year-end cash balance (£1,562k). It is worth reiterating
once again that the balance goes up and down over the year because of seasonal factors; problems such as
those encountered in 2021; as well as one-off items (eg, lump sum upfront payments to licensors) – this is very
apparent from the graph.

As always, time spent prior to the exam on the management accounts and commentary would have been
invaluable. Exhibit 5 highlights the issues likely to be important. The following exhibits expand on and explain
important operational and financial points about the business model that reinforce material in the management
accounts and elsewhere in the AI.

Exhibit 6 builds on the outline of FFL’s business presented in Exhibit 3, providing detail about its customers,
products, staff, marketing and ethical stance, with connections to a variety of other exhibits.

With regard to customers, it presents the key features of, and distinctions between, the two types:

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 CASE STUDY – JULY 2022
Sales to retailers

x All prospective customers undergo due diligence, where applicable covering their webstore functionality.
x Large customers have their own dedicated FFL account managers (‘customer care executives’ or CCEs).
x These customers have multi-year contracts which include minimum annual sales targets and payment terms,
ranging from 30 days to 60 days for the biggest ones – which can be challenging to enforce (a context for the
review of receivables in the management accounts).
x Some shops hold special promotional events for FFL’s products.
x All customers can access an online dashboard (showing all open transactions / orders in the past 12 months).
x FFL dispatches new releases on Friday to arrive at customers for scheduled launch the following Monday.

Online sales

x The expansion of online sales has given FFL a direct relationship with rising numbers of end-consumers,
transforming its marketing activities.
x The website can still support large transaction volumes but would need upgrading if total online revenue
went above £40 million (candidates should gauge how soon FFL might reach this threshold).
x Customers pay by card or electronically through secure portals so FFL generally receives the funds quickly
(this should be borne in mind in any calculation of receivables days).
x FFL’s website also provides information on products and allows visitors to play free online ‘taster’ versions
of some games, as well as offering FAQs, game instructions and an order form for replacement parts.
x FFL also interacts with its end-consumers through a variety of social media channels.

All products are available from retailers, whether in-store or online, or online direct from FFL. Expansion packs or
add-ons (new cards, etc) are available for many games. Expansion packs and replacement parts represent around
1% of overall revenue (an indication that they are too immaterial to feature in any management accounts analysis).

An extract from the website of FFL’s largest customer, Trendy Toys (profiled in Exhibit 7: see below), shows the page
for Lampho. It has several features that encourage visitors to make a purchase – and go on to buy other FFL
products. It also contains a safety warning (see Exhibit 13 below); a specification, showing that no plastic is used
(in line with FFL’s ethos – see below); the delivery charges (which may make the product more expensive than buying
online direct from FFL); and the returns policy (compare the statement by another online retailer, Jigjag, in Exhibit 7 below).
The exhibit goes on to list six products in FFL’s portfolio in addition to the bestselling games already highlighted.

Most of FFL’s 200 staff work at head office, in support and management roles. Payroll costs are spread over cost
of sales, distribution costs and administrative expenses (to bear in mind when assessing cost changes in the
management accounts). Retention rates are high and pay is competitive.

FFL advertises on TV and through social media and other digital platforms. It used to promote new products at
major industry events but many of these were cancelled in 2020 and 2021. Marketing and advertising costs are
included as ‘Promotion’ in the management accounts.

FFL seeks to be a highly ethical, professional and caring business. This covers three aspects of its work:

x Quality and safety: All games undergo rigorous safety testing to meet all relevant standards (see Exhibit 13).
x Ethical practices: FFL operates according to various written policies, including its Code of Conduct, with
which manufacturers and their subcontractors (see Exhibit 10) must demonstrate compliance.
x Environment: In 2020, FFL formally adopted a sustainability policy, including a commitment to reduce the
amount of single-use plastic in all products and eliminate it from packaging and product components (in line
with the industry trend referred to at the end of Exhibit 2).

As can be seen, this wide-ranging exhibit is central to the AI, providing numerous links to other exhibits and
reinforcing candidates’ understanding of key features of FFL’s business.

Exhibit 7 overviews some of FFL’s customers:

x Trendy Toys (TT) is a major UK toys and games retailer, currently with 90 stores overall and looking to
expand further. TT is FFL’s longest-standing and largest customer, generating around 10% of FFL’s total
revenue. TT also has an established website, through which it makes around 15% of all its sales by value.
FFL products are given priority coverage on TT’s site, contributing to high positioning on search engines.
x Checkmate is a games and hobbies retailer with 12 sites across the East of England. With its emphasis on
board games, Checkmate is a key FFL customer for FFL products (3% of FFL’s total annual revenue). FFL
also works closely with Checkmate on promotional activities.
x Your Home is Our Home (YH) is a large UK department store chain. YH has recently revamped its website,
enabling it to grow its share of FFL revenue from 6% to 8%. FFL has to be aggressive when competing with

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 CASE STUDY – JULY 2022
rivals for shelf-space in YH stores. The contract is due for renewal on 1 January 2023, which may provide an
opportunity to improve FFL’s position.
x Jigjag is ‘the UK’s leading specialist online jigsaw store’. Each year, it sells over 200,000 FFL items, 150,000
Bonanza items and 100,000 Hamlin items. It offers a money-back guarantee and welcomes customer feedback.

These profiles show the range in size/type of FFL’s customers and nature of their online activities. The imminent
renewal of the YH contract should be noted. The Jigjag information is presented as a website extract, offering a
different angle. Specifically, unlike for the other three named customers, we are not told its share of FFL’s
business, but it can be estimated by comparing the number of FFL jigsaws sold with its total jigsaw sales. This
gives a figure of 200/1,416 – ie around 14%, or in value terms about £2 million, roughly 3% of FFL’s revenue.
Hence the four named customers account for 27% of the total. The other two companies mentioned by Jigjag
(Bonanza, Hamlin) have been previously mentioned as FFL’s rivals.

Exhibit 8 describes FFL’s product development and marketing activities. It seeks to have a range of products
on the market that are at different stages of the lifecycle and of wide appeal. Market research and feedback are
crucial (a philosophy echoed in the strategy at Exhibit 12). Games occasionally need to be refreshed to maintain
their attraction; sometimes, changes are forced, such as in 2020, when FFL replaced plastic counters for two
games with wooden ones. New games can take months to develop. They are tested rigorously, then piloted
before mainstream release. All product development and design (PDD) is conducted internally. FFL writes off all
development costs as incurred (corresponding to the ‘PDD’ line in the management accounts).

FFL’s rolling marketing calendar reflects scheduled new launches, with the promotional activity and associated
spend planned for each. An example is given for the 18 months (three periods of six months) to 31 December
2022, separately identifying a new range of 3D jigsaws and three new board games, two licensed (including one
new licence). In a typical year, FFL seeks to launch 10 brand-new products and 20 new variants of existing
products. The work involved in launching one of FFL’s established games, Zyx, is showcased, explaining the
pre-launch advertising and marketing steps; positive post-launch reviews; and the subsequent creation, in
response to feedback, of a travel version and an app, created in conjunction with an external developer, Gamu.

This exhibit provides important detail about the processes by which new games are nurtured and how they are
accounted for, an understanding of which is likely to be critical for answering one or more of the exam
requirements.

Exhibit 9 describes a previous (July 2016) game purchase by FFL from Bonanza (listed in Exhibit 3 as one of
FFL’s main rivals, now earning annual revenue of £66 million, more than double that in 2016). Although the
transaction took place six years ago, its effect continues to be very relevant: the game in question, Lampho, is
still one of FFL’s most popular products but as the earlier financial review highlighted, it is currently struggling.
The exhibit reproduces summary data (one actual year, to 30 June 2016, and three years of forecasts) for
Lampho at the time of the purchase, all sales being to retailers only. Notes accompanying the figures state the
basis of their preparation. In broad terms, they show steady growth in units, revenue and gross profit.

The exhibit goes on to set out the basis on which the purchase price was determined – ultimately a negotiation
between FFL’s offer of £2,139k and Bonanza’s counter-offer of £2.5 million. The detailed breakdown of FFL’s
figure, based on a multiple of 3 x (maintainable gross profit less annual incremental administrative expenses),
reveals FFL’s scepticism about Bonanza’s projections. It also aligns the accounting treatment of distribution
costs, overlays expected incremental expenditure and builds in a 10% leeway for negotiation. The eventual
consideration, £2.25 million, was settled in five equal instalments over 18 months, enabling FFL to manage its
cashflow, and recorded as an intangible asset, to be amortised over two years.

It should be evident that Exhibit 9 is pivotal, especially the numerical elements. Candidates should realise the
need to work through the calculations and understand both the subjective and objective factors involved in
negotiating a price for a game. They should also consider the cashflow implications of making a series of large
payments at times of the year when money might be tight (another opportunity to reflect on the graph in Exhibit 4)
and the accounting treatment of the purchase price.

Exhibit 10 overviews FFL’s supply chain and manufacturing. FFL follows the outsourcing model adopted by other
toy manufacturers. Unlike many of them, its direct suppliers are all UK-based, but one (Orvan) does subcontract
part of the production to specialists in Germany and China. FFL recognises an important principle: it can outsource
physical manufacture, but not its overall responsibility, and thus it carries out compliance checks on all suppliers.

The manufacture of board games and jigsaws involves several stages, culminating in assembly, packaging and
distribution. FFL expects to start generating profits from the first production run. Subsequently, unit production cost
is usually higher because of lower volumes, but this is offset by savings on non-recurring costs (design, etc).

FFL’s contracts with three manufacturers set out the agreed service level and key terms, including payment. All
are for three years, expiring in 2023 or 2024. Summaries of the arrangements with each are provided (as for the
main customers in Exhibit 7). Orvan is by the far the largest, accounting for 59% of FFL’s total production cost in

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 CASE STUDY – JULY 2022
2021, up from 52% in 2019. Grand Games’ (GG’s) share is 26% (34%); PZ’s 15% (14%). Orvan makes all three
product types, GG just board games and PZ just jigsaws. After recent issues with PZ (decline in quality, missed
deadlines) FFL has threatened to withdraw its business when the agreement expires if standards do not improve.

The exhibit makes clear the importance of FFL’s supply chain and its reliance on a range of third parties to help
maintain the quality and timeliness of its products. Although there is good diversification, there is always the
danger of operational and/or financial issues with a key supplier (as with PZ here) that can take time and effort
to resolve.

Exhibit 11 opens by explaining the general principles of licensing and some key terms, before going on to set
out the features of FFL’s arrangements, notably those with the three licensors named earlier in the material –
Ringover, Clown House (CH) and Mondo. The details (products, start date, renewal date, fees) differ and the
distinctions are significant. The exhibit describes the important aspects of licence fees: definitions of net and
gross revenue; the range of percentages; the impact of exclusivity; minimum fee clauses; lump sum payments;
and stepped arrangements. The process of developing an app, and role of the licensor (brand owner) in that, is
explained. The exhibit then presents the fee calculation for one licensor (Ringover), building on the foregoing
description. It shows the impact of the minimum fee clause, stepped arrangement and phasing of fee payments.
It also notes that at the last negotiations, ‘FFL carried out a series of calculations using several different possible
fee bases and sales forecasts before agreeing a fee arrangement … and simple cashflow projections’.

It should be readily apparent from the numerous other references to licensing in the AI that this exhibit, both text and
numbers, needs to be fully understood. In particular, with all three named agreements expiring in the next 12 months, it is
very likely that one or more of them will feature in the eventual case requirements. The closing account of FFL’s ‘series’ of
calculations should also provide an echo of the scenario and sensitivity analysis tasks alluded to in Exhibit 1.

Exhibit 12 (August 2021) sets out FFL’s strategy. It explains the overarching philosophy – regularly reviewing
games for relevance and discontinuing/selling if necessary; choosing between designing/developing new games
(there is currently a strong pipeline) or buying established games. The ‘modest’ financial targets for 2022 are
revenue of £75 million (representing an increase of 5.8%, versus growth of 9.5% in 2021) and operating profit of £2
million (ie, a flat performance). Sustainability will remain a key focus. The directors have identified ten key risk
areas, covering the full range of FFL’s activities, and its approach to mitigating them.

Exhibit 12 should be digested carefully as it will inevitably be a reference-point in the exam. The risk areas
either provide new information – eg, FFL’s systems for dealing with cybercrime – or link to other case facts – eg,
cashflow (usefully read in conjunction with the graph in Exhibit 4); currency (a potential exposure in relation to
the supplier Orvan: Exhibit 10).

Exhibit 13 sets out the toy safety compliance framework, which embraces a number of guidance documents.
Before reaching shop shelves, toys must undergo rigorous testing. Those not complying with industry standard
BS EN 71 can be removed from sale, with potentially severe sanctions for manufacturers. The legislation also
requires other labels on certain toys (eg, ‘Warning. Not suitable for children under 36 months’), together with an
indication of the risks, eg, choking on small parts or on plastic packaging.

As outlined above, safety should be taken seriously by all companies in the industry. A failing, however minor,
can cause severe reputational – and hence financial – damage.

Exhibits 14a-d are a series of four media articles on:

x the adaptation by Yolki of some game pieces in response to adverse social media comment; this will add £1
to the cost of each set, which Yolki will not pass on to customers
x the imminent opening of a new state-of-the-art Grand Games factory near Cambridge
x a new licence agreement signed between a well-known entertainment brand and Hamlin (‘which has a
recent history of aggressive negotiations for licences’), reputedly based on net revenue and at a rate of 10%
x the sale of a board game by Bonanza for £5 million, £1 million being contingent on reaching sales targets.

These articles are collectively briefer than is often the case, but they highlight topics clearly of significance to
FFL. In particular, each refers to one of FFL’s counterparties (customer or supplier) mentioned elsewhere in the
AI. There will always be marks available for appropriate reference to AI media coverage, and so this should be
treated as a serious part of preparation and not simply light reading to gloss over once the more technical detail
elsewhere in the AI has been mastered.

Overall, the AI will have provided candidates with the opportunity to develop a comprehensive understanding of
the company and its industry with focused preparation and without the need for any significant further research.

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 CASE STUDY – JULY 2022
Information provided in the Case Study Exam (CSE)

The Exam contained six exhibits comprising new information:

15 Email dated 20 July 2022 from Oswald Perrin to you: Fab Fun Limited (FFL): Draft management accounts
and business issues
16 Note dated 20 July 2022 from Olivia Sarna
17 FFL: Draft management accounts for the year ended 30 June 2022
18a Email dated 18 July 2022 from Olivia Sarna to Oswald Perrin: Renewal of Clown House licence agreement
18b Recent media coverage
19a Email dated 18 July 2022 from Annabella Connor to Oswald Perrin: Potential purchase of heritage games;
and reply dated 19 July 2022 from Raj Kambli
19b Recent media coverage

Exam requirements

Please draft for my review a report addressed to the FFL board. The report should comprise the following.

1. A review of FFL’s performance for the year ended 30 June 2022 in comparison with the year ended 30
June 2021. Your review should be based on the management accounts as set out in Exhibit 17. It should
incorporate the additional information in Exhibit 16 and include appropriate recommendations for
improving the business. It should cover:

x revenue for each product group individually; for each sales channel individually; and in total
x gross profit for each product group individually and in total
x operating profit in total.

You should also respond to FFL’s request for advice (Exhibit 16).

2. An evaluation of the proposed renewal of the Clown House licence agreement (Exhibit 18a).

x For each of the two contract years ending 30 September 2024, calculate, under both Version 1 and
Version 2, the licence fee payable by FFL to Clown House (CH) on two bases: (a) using the
assumptions provided; and (b) adjusting your calculation to show the effect of a six-month delay in the
release of ‘Jack on the Loose’.
x Evaluate the appropriateness of the assumptions provided and the implications of a six-month delay in
the film release.
x Assess the commercial issues for FFL, including those arising from the other proposed contract terms, from
the proposed extension of the CH licensing arrangement and from the media coverage (Exhibit 18b).
x Recommend, with reasons, which of the two versions (Version 1 and Version 2) FFL should accept.

3. An evaluation of the approach from Yolki Games (YG) to sell two of its heritage board games, Yek and Gip,
to FFL (Exhibit 19a).

x Calculate the maximum price that FFL should pay YG for Yek and Gip.
x Evaluate the financial, operational and strategic issues that FFL should take into account when deciding
whether to buy the two board games. Incorporate any ethical and business trust aspects, including
those arising from Exhibit 19b.
x Advise FFL, with reasons, on how to respond to the approach from YG.

Candidates were also told to include an executive summary and to balance their report across the three main
requirements, with other familiar guidance on time allocation; inclusion of ethical issues; and the need to cover at
each requirement all four skills areas: Assimilating and Using Information (A&UI), Structuring Problems and Solutions
(SP&S), Applying Judgement (AJ) and Conclusions & Recommendations (C&R).

They should have spent time studying Exhibit 15 carefully so as to understand the key elements of each requirement;
digest the other new exhibits; and identify the related AI exhibits to integrate into their answers. The requirements
were set out in bullet-point format for ease of reference and to help candidates to ensure that they covered all parts.

For Requirement 1, they should then have begun a more detailed review, enabling them to assess FFL’s 2022
results in light of both their analysis of 2021 carried out in preparation for the exam and the new information
(Exhibit 16). For Requirement 2, it was essential to read Exhibit 18a carefully to identify all critical assumptions
and other issues to be discussed, to set out calculations methodically, and then to reach a reasoned conclusion.
Finally, for Requirement 3, candidates had to relate Exhibits 19a/19b to relevant material within the case –
notably FFL’s current situation and in particular the performance of its heritage games.

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 CASE STUDY – JULY 2022
Analysis of Case Study Exam information

From an initial reading of the new exhibits, candidates should have established that:

x The analysis of performance had to cover the whole statement of profit or loss to operating profit. FFL had
experienced reduced revenue growth, and higher costs translated this into a sharp fall in operating profit.
x The evaluation of the CH renewal required a series of calculations that appropriately reflected the minimum fee
clause and the possibility of a delayed release. Candidates also had to weigh up the qualitative information
provided against that previously seen for another licensor (Ringover).
x The response to YG’s proposal again necessitated a series of well-considered calculations, accompanied by an
assessment of the operational aspects of buying games (something that FFL had not done often in the past) and
a range of ethical issues impinging on the decision.

A more detailed review of the CSE should then have elicited the key facts to be addressed in the exam.

Candidates should have recognised the importance of making relevant use of the additional information at Exhibit 16
and linking it to both the accounts themselves and the foregoing AI material. Comparison of the 2022 accounts and
additional information against the 2021 accounts and business review (Exhibits 4/5) would then reveal that:

x Revenue increased by £1,375k (1.9%) from £70,897k to £72,272k, thus missing the £75 million target by some
way. Licensed board games (L) and jigsaws (J) both saw rises but heritage games (H) continued their decline.
x This was mirrored in sales volume numbers, to the extent that J is now the biggest group by that measure (39.1%).
x Further analysis reveals a sharp drop in average revenue per product in H, a good increase for L (benefiting
from high-priced new games) and J being unchanged. The overall figure is up by 1.7%, from £19.07 to £19.21.
x All three named H products saw their revenue fall, as did the ‘other’ category.
x In contrast, the three named licensors all registered increases, especially CH and Mondo, and ‘other’ licensors
achieved strong growth. These movements were largely due to three new games launched in the year.
x The shift from retail to online continued apace: the latter now accounted for 46.7% of revenue, fast approaching
the levels that would trigger an IT upgrade.
x COS increased by almost the same amount as revenue in absolute terms (£1,377k) but with a bigger differential
in percentage terms. As a result, GP% fell from 23.4% to 23.0%. H’s margin declined but those for the other two
product groups increased.
x Among individual cost categories, manufacture and production was up by 2.0%. The increase was limited by the
impact of a cheaper new supplier. Licence fees rose by 15.2%, largely consistent with growth in L revenue.
x Distribution costs were up by £208k (7.0%) and now represent 4.4% of revenue. This correlates with the strong
growth in online transactions, which are individually smaller.
x Administrative expenses increased by £391k (3.4%) and now represent 16.6% of revenue. Three of the four
categories were up: the exception was promotion, down £209k/10.6%. PDD remains at 3.9% of revenue.
x OP fell from £2,005k (2.8%) to £1,404k (1.9%) in 2021, thus falling well short of target and making dividend
cover increasingly challenging. Despite the profit fall, cash was up strongly, to stand at more than £2 million at
year end. This reflected good working capital management but also reduced capex.

During the year, FFL had ended its troubled relationship with its jigsaw producer (PZ) – as foreshadowed in Exhibit
10. However, the company that it had appointed to replace some of PZ’s work (Huppi) – despite having satisfied
FFL’s due diligence – had created other problems in the form of faulty products, and FFL now had to unravel these.

Candidates will have expected to analyse the 2022 management accounts and to make use of information on
revenue by channel and product group (including individual changes within product groups), as well as explanations
for cost changes. These were all well signposted in the AI. There was plenty of new data to analyse. The additional
task may not have been foreseen but it required a logical approach based on an understanding of FFL’s interaction
with its business partners.

For Requirement 2, candidates were presented with an email by Olivia Sarna, setting out proposed renewal terms
with one of the established licensors, Clown House (CH). They were given forecast revenue figures on which to
calculate the fees payable (following the format used for Ringover in Exhibit 11), together with the proposed fee
rates on both gross and net revenue bases. They then had to reperform the calculation under an alternative
scenario, whereby the release of a film giving rise to a new board game was delayed by six months. They were
provided with a set of assumptions, including a minimum fee clause together with upfront payment; other proposed
contract terms (some similar to Ringover’s; others new); and a request from CH to expand the scope of the
agreement by jointly developing with FFL a range of licensed jigsaws (a strategic opportunity that had been
referred to in the AI).

The email was accompanied by two current media articles: one referring to the film release and likelihood of its
delay, as well as the potential unsuitability of the film’s content for children; the other reporting the rumour that
Hamlin is in talks with CH about a possible board games licence from 1 October 2022.

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Exhibits 18a/b gave candidates a clear set of data with which to work for each element of the requirement:
calculations; evaluation of assumptions; assessment of commercial issues; and reasoned recommendation. It
should have been apparent that: the calculations needed careful planning to ensure that all permutations were
covered; there were numerous assumptions to challenge; and the decision involved weighing up the quantitative
outcome with a range of qualitative criteria.

Exhibit 19a is an email from Annabella Connor (FFL’s Sales and New Business Director), a response from her
colleague Raj Kambli (to whom her email was copied), supplemented by a media article (Exhibit 19b). These
provide candidates with the following facts for Requirement 3:

x Aubrey King, new Managing Director of Yolki Games (YG), recently approached Annabella, wanting to sell two
of YG’s heritage board games to FFL: Yek, a strategy game with an iconic following among games collectors
throughout the world; and Gip, a role-playing mystery game (mentioned in one of the AI press articles). Both are
currently sold through retailers only.
x Aubrey has provided sales volumes, revenue, cost of sales and gross profit for the year ended 30 June 2022
and forecasts for the three years ending 30 June 2025 (paralleling the information given for Lampho in Exhibit 9).
x The forecasts show steady growth in units sold, revenue, gross profit and margin over the three-year period.
x However, they are accompanied by a series of assumptions highlighting additional costs that would need to be
incurred if the transaction went ahead, partly based on the need to transfer production from YG’s existing
Malaysian manufacturer to the UK. This switch could also trigger an (unquantified) early termination penalty.
x YG proposes a price of £2.0 million, payable in four equal instalments, plus a further £0.5 million contingent on
both games individually achieving specified average gross profits. Raj Kambli’s email reply asks whether profits
can be manipulated to avoid having to pay the extra £0.5 million.
x Senior public figures are reportedly concerned that strategy games such as Yek have led to a recent upsurge in
violent behaviour among children and young people. This is vehemently denied by Aubrey King.
With diligent preparatory work on the AI, candidates should have been able to respond well to this requirement.
The challenge lay in integrating the new information with previous content, primarily but by no means exclusively in
Exhibit 9, and planning the structure of their answers so as to cover all parts of the requirement.

The CSE develops a number of features of FFL’s business from the AI, each needing a different technique for
advising the board but all involving financial analysis. Exhibit 15 sets out the route to be followed in writing the
report:

x Requirement 1 entails a clear focus on financial statement analysis across the statement of profit or loss and
an understanding of FFL’s business to enable sensible advice on the Huppi issue .
x Requirement 2 involves financial data analysis, along with professional scepticism and commercial awareness.
x Requirement 3 comprises strategic, operational, financial and ethical analysis. To do justice to this, familiarity
with FFL’s strategy and the wider scenario is needed.

With proper time allocation, careful planning and a logical approach, candidates should have been able to
complete all the requirements within the four hours.

Summary of grades available

Grades were awarded under five topics: Review of FFL’s financial performance; Renewal of Clown House licensing
arrangement; Proposed purchase of heritage games; Executive summary; Overall Assessment Criteria. For each of
the three main requirements, under each of the four Professional Skills, there were two or three ‘boxes’ representing
specific areas in which the skill was to be demonstrated. At each box, one of five available grades was awarded: CC
(Clearly Competent); SC (Sufficiently Competent); IC (Insufficiently Competent); ID (Insufficiently Demonstrated); NA
(Not Attempted). The number of boxes per topic and skill (below) reflects an even balance between the three main
requirements, as indicated in the CS Exam rubric.

A&UI SP&S AJ C&R Total

Review of FFL’s financial performance 3 3 3 2 11
Renewal of Clown House licensing arrangement 3 3 3 2 11
Proposed purchase of heritage games 3 3 3 2 11
9 9 9 6 33
Executive summary 6
Overall Assessment Criteria 1
40

© The ICAEW 2022 Page 13 of 21

 CASE STUDY – JULY 2022
PART 3: COMMENTARY ON CANDIDATES’ PERFORMANCE

Overview of professional skills

Assimilating and Using Information (A&UI)

A&UI was a strong skill on this exam, reflecting in particular the inclusion of appropriate, well-labelled appendices
in Requirements 1 and 2. Candidates exploited the spreadsheet functionality of the enhanced software to produce
their calculations effectively and efficiently. Notable at Requirement 2 was the number of candidates who
supplemented their fee calculations with sensitivity analysis and/or a payment schedule. Appendices for
Requirement 3 were less well done.

For each requirement, there were three boxes, the first two for use of numerical information in the case and the
third for referring to FFL’s business issues and wider context. For boxes 1 and 2 at Requirement 1, many
candidates achieved strong passing grades by segmenting the revenue for heritage and licensed board games
into the figures for the named games and licensors. Fewer provided calculations for average revenue per product
group, which then impaired their subsequent analysis work.

For Requirement 2, the majority produced relevant calculations, enabling them to go on to consider the relative
merits of the two versions. Where they were marked down, it was often for unclear labelling, so that it was not
possible for a marker to work out what the final calculated fees were. Better-organised candidates will have spent
a few valuable minutes deciding how best to present calculations that needed only a few lines – not a page of
figures in which the author could easily get lost and forget what needed to be worked out (there were numerous
instances of this across the cohort).

As often, Requirement 3 appendices were significantly less well done, even though there was a clear template
(AI, Exhibit 9). Most candidates did produce relevant basic calculations, rather fewer tried to work out average
revenue per game or a GP% for Yek and Gip, so that they could not then go on to carry out a reasonableness
check on the figures by reference to FFL’s own norms. An encouraging number of candidates did, however, carry
out some sensitivity/scenario analysis here, for example by using a different adjustment to cost of sales.

The result for Box 3 was comfortably the lowest for all three sections. In each case, the options covered basic
contextual information that was required for a full understanding of the scenario. Candidates who had immersed
themselves in FFL and its industry and who were able to articulate this tended to achieve higher scores here.

Structuring Problems and Solutions (SP&S)

Candidates generally displayed good SP&S skills, although this was by no means universal, with some SP&S
boxes achieving low average scores.

Box 1 at Requirement 1 (revenue by product/channel) was answered very well, with the vast majority of candidates
earning a passing grade. They commented on the key components of revenue, integrating relevant facts from Exhibit
16. The main item omitted was an analysis of unit sales volumes. Box 2 covered gross profit and operating profit,
and this was again well done. To analyse these lines properly and hence earn a CC grade, candidates had to delve
into the related cost items. For example, using the information about promotion, PDD costs and licence fees in
Exhibit 16, they considered the changes in these items in the context of the new games launched during the year.
Box 3 required candidates to identify the key facts surrounding the issue that had arisen with the supplier Huppi. A
significant majority obtained passing grades here. For those who did not, it was mainly because they failed to follow
the wording of the requirement (mirrored by the marking key) that specifically mentioned three parties: Huppi,
retailers and consumers.

At Requirement 2, unusually, only about half of candidates scored a passing grade for boxes 1 (calculation of fee
with delay) and 2 (assumptions / film delay). This was because they did not prepare full calculations to show the
fee in the case of the film being delayed for 6 months or, if they did so, they overlooked the minimum fee clause.
With regard to the assumptions, most candidates did discuss some, but only a minority really got to grips with the
key issues here, notably the possible loss of exclusivity and reasonableness of the underlying revenue growth/mix.

In Requirement 3, candidates did well on boxes 1 (calculation of maximum price) and 3 (ethical and business trust
issues), but much less so on box 2 (operational and strategic issues). Although they had a pricing example to follow
from the AI, the exam scenario contained some subtle variations, and candidates needed to work out how to deal
with these. Where they scored less well, it was typically because of simple errors, which meant that they were
unable to achieve the figures highlighted in bold on the marking key. Candidates were often unable to stand back
and reflect on the implications of the figures they were using. For example, they didn’t think through the implications
of bringing two established games under a new owner or the challenges that might be involved in switching
production from overseas (of which FFL had no experience) to the UK. Most were able to identify the key ethical
aspects of the scenario.

© The ICAEW 2022 Page 14 of 21

 CASE STUDY – JULY 2022
Applying Judgement (AJ)

AJ was, once more, the weakest skill. Although overall stronger than usual (with especially encouraging results
for Requirement 1), it was again a critical differentiator among marginal candidates.

At Requirement 1, candidates had to evaluate their work on revenue (box 1), GP/OP (box 2) and the Huppi issue
(box 3). The average marks were very good for all three. In box 1, the best candidates took the time to rationalise
the results of the new games launched in the year and their relative impact on revenue. Those who had prepared
calculations of average revenue per product were able to develop these into meaningful comments. Discussion of
costs and profit can often be poor, but in this case there was some strong work, for example by those who linked the
increase in licence fees payable to changes in licensed board game revenue or the higher distribution costs to the
changed retailer/online mix. Evaluation of the Huppi issue was also well done. Candidates made some pertinent
recommendations, making use of the exam information itself but also the AI, eg, recall insurance (Exhibit 12) – as
well as that precious commodity, common sense.

For Requirement 2, there was a disappointing performance for the first two boxes (evaluation of fee calculations;
evaluation of assumptions / film delay). Although candidates gave some basic comment on the output from their
figures, many were unable to think these through further, eg, to assess the impact of the minimum fee clause if
revenue forecasts are not met or how the fee rate might need to change if the threatened move to non-exclusivity
occurs. Similarly, they did not give a balanced view on the achievability of the forecasts in the event of a delay in
the film release. Box 3 (evaluation of commercial issues) was better but even here barely half of candidates
achieved passing grades. They were unsure what to do with the restraint of trade term being proposed by CH and
most dealt only superficially with the idea of moving into licensed jigsaws even though it had been mooted as a
strategic option in the AI.

For Requirement 3, box 2 (operational and strategic impact) was covered very poorly, a function of their earlier
weak analysis. Thus they did not reflect on the ambiguity of the early termination payment (who would pay it?
how much was it? how might it affect the purchase price?); how the new games might affect sales of similar
games already in FFL’s portfolio; or the fact that Yek and Gip were not currently sold online. The marks for box 1
and box 3 were better but still weak. For box 1, too many took the figures at face value, without stopping to think
that Yolki might have different accounting policies or even to see how the figures for Yek and Gip benchmarked
against FFL’s own accounts. For box 3, the analysis of ethical and business trust issues had been good, but this
did not translate into evaluation. For example, candidates did not critique the cost of the new wooden pieces (if
the game was available in three formats, the cost for each might be different; and was it clear who would pay for
these and how that might impact the purchase price?) Even worse, many were very disparaging about Raj
Kambli’s question about avoiding the contingent consideration payment, not realising that it was very likely to be
academic anyway as the prescribed profit thresholds would not be met.

Conclusions and Recommendations (C&R)

As is almost always the case, candidates did better for all three requirements on the Conclusions boxes than on the
Recommendations boxes.

For Requirement 1, the Examiners had expected a better performance following their decision to ask specifically for
‘appropriate recommendations for improving the business’ but this did not have the desired result and perhaps
even had the opposite effect of constraining candidates’ creativity. Virtually all candidates concluded on all
elements of their financial analysis, but their recommendations did not always follow logically from or do justice to
their foregoing work. They had perhaps prepared for a particular scenario and when this didn’t materialise, they
were unable to adapt on the day. It is perhaps no coincidence that a common piece of advice was to plan for an IT
upgrade, as this had been flagged in the AI and the 2022 management accounts made it even more imminent.

For Requirement 2, marks were variable, with fewer than half of candidates obtaining a CC grade for what should
have been a straightforward Conclusions box. Some did not come to a decision about which version of the fees FFL
should accept, even though they were asked to reach one. Recommendations were patchy: many candidates
missed the obvious need to discuss some of the fundamental issues (eg, exclusivity) with CH itself.

Requirement 3 was similar. Candidates generally concluded on the key points but, again, some did not provide a
response despite being asked for one; others missed out on the first bullet by suggesting a maximum price above
that offered by Yolki – though some did then appreciate that this was unusual and made attempts to explain it.

Overall Assessment Criteria (OAC)

A majority of the cohort achieved passing grades for OAC. Most candidates rightly included a disclaimer of liability.
The most striking failing on this occasion was in respect of ‘suitable language’ and specifically in responding to Raj
Kambli’s suggestion in relation to the Yolki contingent consideration.

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 CASE STUDY – JULY 2022
Executive summary

The marking key combined precision (eg, ‘concludes/recommends on cashflow impact / restraint of trade’ at
Requirement 2; ‘important not to miss Nov/Dec sales / scope for online sales’ at Requirement 3) with flexibility (a
range of possible recommendations for both revenue and costs at Requirement 1; conclusion on any ethical or
business trust issue at Requirement 3). Performance was fairly consistent across the three requirements and overall
a little better than usual.

For Requirement 1, candidates generally did well in box 1 by reproducing their key numerical findings from the main
report, while the range of options also enabled them to score well in box 2. Some did not include their output from the
Huppi issue. In Requirement 2, the main failings were in not picking up on the potential loss of exclusivity and/or on
the cashflow impact and/or proposed restraint of trade clause. For Requirement 3, weaker candidates did not
achieve the mark for ‘important not to miss Nov/Dec sales / scope for online sales’ and/or did not conclude on the
supplier issues – of which there were many to discuss.

Overall, candidates achieved the ‘Appropriate summary of report section’ bullet at each requirement, producing a
summary of the requisite length.

Requirement 1: Review of FFL’s financial performance

Requirement 1 offered ample scope for in-depth financial statement analysis, with quite a bit of new material to
assimilate. If they had spent the necessary time studying FFL’s performance in previous years, they should have
come to the exam fully equipped to tackle a requirement of this nature. The challenge was to integrate the additional
numerical information at Exhibit 16 into a coherent narrative on FFL’s performance by working through it
systematically and without spending time on excessive – or irrelevant – analysis.

The vast majority of candidates produced high-quality analysis of the main numbers. Appendix 1 was mostly very
well done at a sufficient level of detail, showing key movements, with both absolute and % figures. Where lower
grades were awarded, this was usually because candidates had not delved into the named licensors/games or
sales volumes or revenue per product type, which would have added a further dimension to their analysis. They
should have been ready for this if they had worked through Exhibit 4 during their preparation. Presentation was
mostly clear, indicating that candidates had made the effort to hone their technique in advance, giving them extra
time to write their commentaries.

For candidates who had spent preparation time understanding FFL’s business model, the issues in Exhibit 16
should have been familiar – and in some cases predictable – from the AI, but the exact figures involved and their
impact on the results needed careful thought. In particular, to appreciate fully the impact of the new games
launched in the year, they needed to refer not only to the accounts but also to the marketing calendar (Exhibit 8)
and licensing arrangements (Exhibit 11). If they had done the analysis of revenue by product type, they would also
have been able to comment on the figures for the three new products and their effect on the overall averages, as
well as on the impact of these products on key cost areas – namely, promotion, PDD and licence fees: “Licence
fees as a percentage of revenue increased from 11.2% to 11.4%, nearing FFL’s top range for licence fees of 12%. This may be
partly explained by the Antis fee of £100k, which represents 3.5% of FFL’s licence fee costs. Indeed, the £100k is 13.0% of
revenue, much higher than the normal range.” Similarly, better candidates were able to recognise the impact on
margins of the changing retailer/online mix, taking into account the higher average discount rate in 2022; and the
changes in suppliers. For the latter, it was important to realise that Huppi had reached a 3% share of FFL’s
production costs despite being in place for only the last three months of the year.

In dealing with the defective jigsaws, candidates were required to advise FFL on its actions towards three parties –
Huppi, retailers and consumers. Better candidates made links to three of the ten risks that it had identified (Exhibit
12), in relation to suppliers; inventory and returns; and safety – all of which were very relevant to the situation in
which FFL now found itself. They also understood the challenge of doing the right thing for the growing number of
individual online customers.

Requirement 2: Renewal of Clown House licensing arrangement

Performance on Requirement 2 was on average slightly worse than for recent sittings. Many candidates displayed
poor AJ skills and weaker ones got themselves in a tangle with their calculations, which limited their SP&S marks.

The requirement was worded in bullet-points, setting out the successive tasks that candidates had to complete. The
first part of this was a series of four iterative calculations, all following the same broad structure but with variations that
had to be carefully reflected and clearly presented. For each calculation, two years of figures had to be prepared. A
template had been provided in Exhibit 11, so it should not have been difficult for candidates to create a suitable format
– and indeed they might have been expected to practise it in advance. In the event, a wide range of layouts was in
evidence: better scripts needed only a small amount of space, with the headline figures clearly shown in bold text; but
at the other extreme the calculations covered the electronic equivalent of an Amazonian rainforest, severely testing

© The ICAEW 2022 Page 16 of 21

 CASE STUDY – JULY 2022
markers’ interpretive skills. The second group invariably failed to score the ‘numbers labelled AND clearly derived’
mark but depending on where they were on the scale, they may have done enough to secure the majority of the
calculation marks in AU&I and SP&S. Candidates were generally able to produce correct answers for the basic
scenario but then came unstuck when calculating the licence fee in the event of a delayed film release, failing to adjust
for the deferral of revenue. Another common failing was not dealing with the minimum fee clause: often a candidate
would recognise the need for an adjustment but would not then reflect it in the final fee figures. Some went on to try
and work out the gross profit from the CH arrangement: this was not asked for and there was not enough information.

Better candidates – typically those whose initial calculations were produced with ease – were able to go on and rework
their numbers under different scenarios, eg, using FFL’s existing licence fee norms, to see how this would affect the
decision. They also showed the phasing of the fee payments, leading to a discussion of FFL’s cash capacity.

As always, the number-work was just a prelude to a wider exploration of the scenario and this is where many struggled
to display their higher skills. In particular, they did not work through all the ramifications of the possible lost exclusivity
(revenue forecasts, fee rates, behaviour of CH) or CH’s clause restraining FFL’s trade. They did not consider the CH
fee rate options with those already in use by FFL (especially in its non-exclusive arrangement with Mondo). They also
failed to carry out reasonableness checks on the revenue forecasts, including the retailer/online mix, which should
have been a simple follow-up to their Requirement 1 analysis. Coverage of the extension of the contract to jigsaws
was also often brief, eg, ‘There appears to be an opportunity for developing a range of licensed jigsaws. FFL does not currently
have any of these in its portfolio but they may be beneficial to have given the increasing popularity in jigsaws, particularly 3D’.
There were a number of aspects that could have been introduced here, such as its scope for diversifying FFL’s product
range, balanced with the need to check supplier capacity, especially in the wake of the ongoing Huppi issue.

Requirement 3: Proposed purchase of heritage games

Requirement 3 is usually the weakest across the cohort. On this occasion the marks profile was higher than that
for Requirement 2 – though only just. Again, the Examiners had presented the requirement in a user-friendly
series of bulleted steps. Candidates had to do a detailed calculation; evaluate financial, operational and strategic
issues (including ethical and business trust); and advise FFL on how to proceed.

A template for the calculation had been given in Exhibit 9, relating to one of FFL’s few previous game purchases,
Lampho. Candidates who followed this would have gone a long way towards achieving good AU&I and SP&S marks.
However, it was essential to adapt to the specifics of the Yolki scenario and make the adjustments that were spelt
out in Exhibit 19a. While it was possible to shortcut the calculation and still come up with a purchase price, those
who used a more comprehensive layout were able to show the individual figures for Yek and Gip. This then allowed
them to go and make average revenue and GP comparisons with FFL’s norms for licensed games, and also to show
whether Yek and Gip would achieve GP levels that triggered payment of the contingent consideration (see Appendix
3 below). Candidates who didn’t keep their wits about them could easily slip into errors, such as: applying the £1
increment to both games; increasing GP rather than COS by 10%; using 2022 as one of the three years; deducting
the extra administrative expenses instead of adding them. One or more of these could have led to a price that was
too far below or well above the one being proposed by Yolki – which was not necessarily fatal (as illustrated by the
First Sample Answer), provided that the ensuing discussion followed on logically.

Candidates who spent valuable minutes structuring their calculations then had more time to reflect on the bigger
picture, and hence to offer sensible judgements, leading to focused conclusions and recommendations. They looked
at the key issues holistically rather than one-dimensionally. For example, on the £1 increment, they considered
whether this would apply equally to all three formats of Gip; and looked at the precedent in the AI (Exhibit 14a) as a
basis for debating whether the cost could be passed on. Similarly, they thought through the various aspects of the
existing manufacturing arrangements: Were the estimated 10% cost savings accurate? How much disruption and
effort would be involved in transferring production to the UK? What were the precise terms of the penalty clause?
Could FFL in fact retain the Malaysian company despite not at present having any direct relationships with non-UK
producers? Weaker scripts paid little more than lip service to this critical operational challenge: ‘Production would be
transferred to existing UK manufacturers. This will increase the pressure on them and they may not have the
capacity.’ Similarly, good candidates pondered the strategic pros and cons of taking on two new games which
seemed similar to existing – and probably struggling – FFL heritage games, Hoodiddit and Panthero (Exhibit 6).
More observant candidates also noticed that Yek and Gip were currently sold only through retailers. This meant a
whole untapped online market for the two games – as well as supplementing their roster for existing FFL games with
some retailers who might not already be customers.

As tends to be the case, candidates identified ethical / business trust issues adequately but were less good at
evaluating them. They were aware of the possible bias in Yolki’s figures, Stronger ones, when writing about the
media article that linked Yek to violence, offered a balanced view. However, many candidates had their ethical
sensibilities offended by Raj Kambli’s email proposing some creative accounting and offered stern moralistic advice.
A more measured response was needed here. Candidates who had prepared more detailed calculations would have
seen that Gip was very unlikely to achieve the £0.8 million target average gross profit. It would also be important to
have a clear definition of ‘gross profit’ in any agreement with Yolki.

© The ICAEW 2022 Page 17 of 21

 CASE STUDY – JULY 2022

PART 4: APPENDICES

APPENDIX 1: FINANCIAL STATEMENT ANALYSIS: FFL’s financial performance

Summary 2022 2021 Change Change

£000 £000 £000 %
Heritage board games 31,594 33,721 -2,127 -6.3%
Licensed board games 25,132 22,198 2,934 13.2%
Jigsaws 15,546 14,978 568 3.8%
Revenue 72,272 70,897 1,375 1.9%
Heritage board games (22,514) (23,819) -1,305 -5.5%
Licensed board games (20,855) (18,591) 2,264 12.2%
Jigsaws (12,308) (11,890) 418 3.5%
GP% GP%
Cost of sales (55,677) (54,300) -1,377 -2.5% 2022 2021
Heritage board games 9,080 9,902 -822 -8.3% 28.7% 29.4%
Licensed board games 4,277 3,607 670 18.6% 17.0% 16.2%
Jigsaws 3,238 3,088 150 4.9% 20.8% 20.6%
Gross profit 16,595 16,597 -2 0.0% 23.0% 23.4%

Revenue
By channel
Mix 2022 Mix 2021
Retailers 38,543 45,191 -6,648 -14.7% 53.3% 63.7%
Online 33,729 25,706 8,023 31.2% 46.7% 36.3%
72,272 70,897 1,375 1.9% 100.0% 100.0%

Mix (by product group)

Revenue Revenue Volume Volume
Heritage board games 43.7% 47.6% 36.6% 38.4%
Licensed board games 34.8% 31.3% 24.3% 23.5%
Jigsaws 21.5% 21.1% 39.1% 38.1%
100.0% 100.0% 100.0% 100.0%

Sales (by volume)

000 000 000 %
Heritage board games 1,379 1,426 (47) -3.3%
Licensed board games 913 875 38 4.3%
Jigsaws 1,471 1,416 55 3.9%
3,763 3,717 46 1.2%
Revenue by product
Heritage board games £000 £000 £000 %
Mucho 5,229 5,630 -401 -7.1%
Zyx 6,063 6,744 -681 -10.1%
Lampho 3,159 3,621 -462 -12.8%
14,451 15,995 -1,544 -9.7%
Other games 17,143 17,726 -583 -3.3%
31,594 33,721 -2,127 -6.3%
Units sold 1,379 1,426 -47 -3.3%
Average revenue per unit £22.91 £23.65 -£0.74 -3.1%
Share – named products 45.7% 47.4%

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 CASE STUDY – JULY 2022
Licensed board games £000 £000 £000 %
Ringover 3,804 3,711 93 2.5%
Clown House 3,975 3,503 472 13.5%
Mondo 4,988 4,319 669 15.5%
12,767 11,533 1,234 10.7%
Other licensors 12,365 10,665 1,700 15.9%
25,132 22,198 2,934 13.2%
Units sold 913 875 38 4.3%
Average revenue per unit £27.53 £25.37 £2.16 8.5%
Share – named licensors 50.8% 52.0%

Jigsaws
Total 15,546 14,978 568 3.8%
Units sold 1,471 1,416 55 3.9%
Average revenue per unit £10.57 £10.58 -£0.01 -0.1%

Overall revenue per unit £19.21 £19.07 -£0.14 0.7%

Cost of sales by cost area

Manufacture & production 49,474 48,504 970 2.0%

Head office overheads 3,327 3,299 28 0.8%
Licence fees payable 2,876 2,497 379 15.2%
55,677 54,300 1,377 2.5%

Average licence fee rate 11.4% 11.3%

Administrative expenses

General administration 5,973 5,594 379 6.8%

Premises, IT & facilities 1,443 1,297 146 11.3%
Promotion 1,769 1,978 -209 -10.6%
Product design, devt (PDD) 2,839 2,764 75 2.7%
12,024 11,633 391 3.4%
As % of revenue 16.6% 16.4%
PDD as % of revenue 3.9% 3.9%

Distribution costs

Distribution costs 3,167 2,959 208 7.0%

% of revenue 4.4% 4.2%

Operating profit

Operating profit 1,404 2,005 -601 -30.0%

Operating margin 1.9% 2.8%

Other analysis – new products

x Average revenue per game: Antis = 770/20.2 = £38.12; Mondo = 465/13.1 = £35.50, AO = 240/8 = £30
x Effective licence fee rate: Antis game = 100/770 = 13.0%
x Promotional costs as % of annual total = £280k/£1,769k = 15.8%; Antis = £159k/£1,769k = 9.0%

© The ICAEW 2022 Page 19 of 21

 CASE STUDY – JULY 2022

APPENDIX 2: FINANCIAL DATA ANALYSIS: Calculation of licence fees payable (£000)

Basis (a) Basis (b)

No delay 6m delay
Year 1 Year 1
Version 1
On annual gross revenue up to £4.0 million (10%) 400 400
On annual gross revenue > £4.0 million and < £5.0 million (9%) 90 90
On annual gross revenue > £5.0 million (8% x £0.6m)/(8% x £0.2m) 48 16
Subtotal – Version 1 538 506
Minimum fee adjustment 12 44
550 550
Year 2 Year 2
On annual gross revenue up to £4.0 million (10%) 400 400
On annual gross revenue > £4.0 million and < £5.0 million (9%) 90 90
On annual gross revenue > £5.0 million (8% x £1.6m)/(8% x £2.0m) 128 160
618 650
TOTAL – Version 1 1,168 1,200

Version 2 Year 1 Year 1

On all annual net revenue (12% x £4.8m)/(12% x 4.45m) 576 534
Minimum fee adjustment - 16
576 550
Year 2 Year 2
On all annual net revenue (12% x £5.7m)/(12% x £6.05m) 684 726
684 726
TOTAL – Version 2 1,260 1,276

Difference 92 76

Phasing of payments (£000)

1 October 31 October 1 October 31 October

2022 2023 2023 2024
Basis (a)
Version 1, Year 1 550
Version 1, Year 2 550 68
Version 2, Year 1 550 26
Version 2, Year 2 550 134

Basis (b)
Version 1, Year 1 550
Version 1, Year 2 550 100
Version 2, Year 1 550
Version 2, Year 2 550 176

Sensitivity/scenario analysis

The above figures can be reworked under the existing terms with CH (9% flat rate). Assuming no minimum fee (none is
mentioned at Exhibit 11), this would give fees of: Basis (a): £504k + £594k = £1,098k; Basis (b): £468k + £630k = £1,098k.
The figures under the new rates are quite a bit higher, so it is unsurprising that CH is keen to impose them.

Other sensitivity analysis (eg, other fee rates, different thresholds or the impact of non-exclusivity) could be done, to show
how much revenue would have to change for Version 2 to be financially preferable.

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 CASE STUDY – JULY 2022
APPENDIX 3: COMMERCIAL DATA ANALYSIS: Calculation of maximum price payable
Yek Gip Total
Forecasts for years ending 30 June £000 £000 £000
2023
Sales volumes (000) 64 120 184
Revenue 2,200 2,000 4,200
Cost of sales (per forecast) (1,350) (1,200) (2,550)
Additional 10% cost of sales (135) (120) (255)
Additional £1 per unit (120) (120)
Gross profit 715 560 1,275
2024
Sales volumes (000) 70 130 200
Revenue 2,450 2,200 4,650
Cost of sales (per forecast) (1,500) (1,300) (2,800)
Additional 10% cost of sales (150) (130) (280)
Additional £1 per unit (130) (130)
Gross profit 800 640 1,440
2025
Sales volumes (000) 75 140 215
Revenue 2,650 2,400 5,050
Cost of sales (per forecast) (1,600) (1,400) (3,000)
Additional 10% cost of sales (160) (140) (300)
Additional £1 per unit (140) (140)
Gross profit 890 720 1,610
Average gross profit 802 640 1,442
Additional admin expenses (575)
Additional distribution costs (50)
817
Deduct 10% leeway (82)
735
Maximum price x3 2,205
Sensitivity/scenario analysis (example): cost of sales increment = 20% rather than 10%

Additional cost of sales (aggregate) (445) (390) (835)

Additional cost of sales (annual average) (148) (130) (278)
Adj. ave. gross profit less admin/dist (817 – 278) 539
Deduct leeway (54)
485
Maximum price x3 1,455
Additional analysis (years ending 30 June)
Gross profit margins
2023 32.5% 28.0% 30.4%
2024 32.7% 29.1% 31.0%
2025 33.6% 30.0% 31.9%
FFL's existing heritage games GP% 28.7%
Average revenue per game
2023 £34.38 £16.67 £22.83
2024 £35.00 £16.92 £23.25
2025 £35.33 £17.14 £23.49
FFL's existing heritage games average revenue £22.91

© The ICAEW 2022 Page 21 of 21

July 2022 Exam - Fab Fun Ltd

OAC R1 R2 R3 TOTAL

ES 2 8 8 8 26
AUI SPS AJ CR

Req 1 12 18 18 10 58

Req 2 13 17 18 10 58

Req 3 13 17 17 11 58

TOTAL 42 51 51 31
200

Abbreviations
H Heritage games
L Licensed games
J Jigsaw puzzles
CH Clown House
YG Yolki Games
Y Yek
G Gip
V1/V2 Version 1/2
PDD Product design and development
 EXECUTIVE SUMMARY
R1 - Review of FFL's financial perf. / request for advice

ES.OAC ES.R1.1

(A) Report structure: disclaimer AND from firm AND headings (S) (A) Qualitative comment on overall revenue with fig

(B) Suitable language: formal AND tactful AND ethical (FT)) (B) Qualitative comment on rev by product/channel with fig

(C) Qualitative comment on GP/GP% overall/by product with fig

(D) Qualitative comment on overall OP/OP% with fig

ES.R1.2

(A) Revenue: monitor/discontinue/promote loss-making products

/ review prices/discounts / prep for competitive renewals

(B) Costs: monitor promotion spend / review delivery recharges

/ consider outsourcing distribution / discounts/licence fees

(C) Concludes/recommends on Huppi issue

(D) Appropriate summary of report section

Column total Column total

R2 - Renewal of Clown House licensing arrangement R3 - Proposed purchase of heritage games

ES.R2.1 ES.R3.1

(A) Gives licence fee for both bases for V1 AND V2 with figs (A) Suggests max price (must be <£2.5m)

(B) Concludes on assumptions (B) Concludes on main financial/operational/strategic issue

eg contract size, contingent consid'n, Lampho, add'l costs

(C) Concludes/recommends on potential loss of exclusivity (C) Concludes/recommends on ethical/business trust issues

(D) Concludes/recommends on cashflow impact (D) Important not to miss Nov/Dec sales / scope for online sales
/ restraint of trade

ES.R3.2

(A) Concludes on how to respond with reason

ES.R2.2

(A) Concludes on choice of version with reason

(B) Concludes on supplier issues
eg move to UK, penalty, forex, DD, capacity

(B) Concludes/recommends on impact of delay

eg fees higher, miss peak sales (C) Negotiate T&C / validate figures

(C) Negotiate T&C

(D) Appropriate summary of report section

(D) Appropriate summary of report section

Column total Column total

 REQUIREMENT 1 - Review of FFL's financial performance and request for advice
ASSIMILATING & USING INFORMATION STRUCTURING PROBLEMS & SOLUTIONS

R1.AUI.1 R1.SPS.1
Appendix 1 FA: Revenue by Product/Channel (report)
(A) Analysis by volume (A) Retail: down £6,648k / 14.7% / share 53.3% v 63.7%

(B) Mix calculations by product(HLJ)/channel (B) Online: up £8,023k / 31.2% / share 46.7% v 36.3% >

(C) Analysis by named games/named licensors (C) H: down £2,127k / 6.3% / share 43.7% v 47.6% >

(D) Analysis of average rev/product (D) L: up £2,934k / 13.2% / share 34.8% v 31.3% >

(E) J: stable/up £568k / 3.8% / share 21.5% v 21.1% >

(F) Volume: H down 47k 3.3% / L up 38k 4.3% / J up 55k 3.9%

R1.AUI.2 R1.SPS.2
AI/CSE information (report) Financial analysis: GP/OP (report)
(A) Overall revenue: up £1,375k / 1.9% (A) H: COS down 5.5% / GP down 8.3% / GP% 28.7% v 29.4%
OR
Volume: up 46k / 1.2%
(B) L: COS up 12.2% / GP up 18.6% / GP% 17.0% v 16.2%

(B) COS: up £1,377k / 2.5%

(C) J: COS up 3.5% / GP up 4.9% / GP% 20.8% v 20.6%

(C) GP: down £2k / 0.0% (D) Manuf/Prod: up £970k / up 2.0% >
OR
GP%: 23.0% v 23.4%
(E) Licence fees: up £379k / up 15.2% >

(D) OP: down £601k / 30% / OP% 1.9% v 2.8% (F) Admin: Promotion down £209k 10.6% / PDD up £75k 2.7% OR
Distribution: up £208k 7.0% >

R1.AUI.3 R1.SPS.3
Business issues / wider context Request for advice (report)
(A) Impact of COVID-19 on the business / fragile economy (A) Huppi: DD done / new supplier >

(B) UK industry forecast: down 4% OR (B) Huppi: potential safety issues / use of poor materials >
Online now 1/3 of toys and games purchases

(C) Average discount increased 26.0% v 25.5% (C) Huppi: casts doubt on FFL's 'SUCCESS' pledge >
/ previously identified risks (2,3,8)

(D) Seasonal business / importance of Nov/Dec sales (D) Retailers: FFL responsibility to ensure safe product >
/ FFL should comply with safety/BTHA guidelines

(E) Retailers: may have further faulty stock >

Column total (F) Consumers: refunds required / potential damage to reputation

>
APPLYING JUDGEMENT CONCLUSIONS AND RECOMMENDATIONS

R1.AJ.1 R1.CR.1
Evaluation of revenue analysis Draws conclusions (under a heading)
(A) Total revenue: slower growth 1.9% than last year 9.5% (A) Qualitative comment on overall revenue with fig
/ target of £75m not met

(B) Online: near predicted 50% / ave prices higher (no discount) (B) Qualitative comment on rev by product/channel with fig
/ nearing £40m meaning new IT investment needed

(C) H: all named games rev down / fall in Lampho worrying (C) Qualitative comment on GP/GP% overall/by product with fig
/ reduced reliance on named games

(D) L: 3 new games = 1/2 increase/£1,475k to revenue (D) Qualitative comment on overall OP/OP% with fig
/ new games higher price / Mondo/Ringo/Antis impact

(E) J: now largest by volume / growth of 3D jigsaws

(F) Ave rev/product: comment on H/L/J changes

R1.AJ.2
Evaluation of GP/OP analysis R1.CR.2
Makes recommendations
(A) COS rising faster than/in line with revenue
(A) Analyse GP% by product: discontinue/re-launch loss-makers

(B) GP/GP%: impact of changes in ave price/product

/ impact of discounts / impact of mix (B) Need to keep innovating new games/refreshing H games

(C) OP/OP%: unsustainable / short of £2m target

/ soon unable to pay £1m dividend (C) Review pricing/discounts/licence fee to maintain margins

(D) Manuf/Prod: up in line with vol / up due to expensive parts

/ offset by Huppi (D) Increase delivery charges to cover costs / outsource dist'n?

(E) Licence fees: new games have higher fees / minimum fees
/ consideration of Antis fees / up more than L rev (E) Start planning for IT upgrade now

(F) Admin: eg promo spend down may have impacted rev

Distribution: eg much lower than inc in online sales (31 OR (F) Other commercial recommendations

R1.AJ.3
Eval/recs on request for advice
(A) Huppi: act quickly / discuss extent of issue / more DD visits

(B) Huppi: consider change in supplier

eg check capacity, overreliance, costs

(C) Huppi: check contract T&Cs / check insurance policy

/ get legal advice

(D) Retailers: mustn't lose big retailers / organise recall

/ discuss with retailers
Column tota
totall
(E) Retailers: establish extent of recall / calc cost of recall
/ consider provision for recall/refund costs

(F) Consumers: update returns policy / press release

/ legal advice / contact online customers
 REQUIREMENT 2 - Renewal of Clown House licensing arrangement
ASSIMILATING AND USING INFORMATION STRUCTURING PROBLEMS & SOLUTIONS

R2.AUI.1 R2.SPS.1
Appendix 2 Calc of fee with delay (report/appendix)
(A) Numbers labelled AND clearly derived (A) Calc V1 fees Yr1 £400k+£90k+£16k / £506k AND
Calc V1 fees Yr2 £400k+£90k+£160k / £650k

(B) Calculation of fees under V1 (Gross) AND V2 (Net) (B) Calc V2 fees Yr1 £534k AND
Calc V2 fees Yr2 £726k

(C) Calculation of fees assuming 6mth delay (V1 AND V2) (C) Calc Min Fee Adj V1Yr1 £44k
(D) Calc Min Fee Adj V2 Yr1£16k
(D) Calculation of sensitivity / gives fee payment schedule (E) Calc total fees with delay for V1 £1,200k AND V2 £1,276k

R2.SPS.2
Assumptions / film delay
(A) Yr1 has 50:50 online/retail split v current split 47%:53% >
R2.AUI.2
Calc of fee without delay (report/appx)
(B) Yr1/Yr2 growth 20.8%/18.7% v current growth 13.5% >
(A) Calc V1 fees Yr1 £400k+£90k+£48k / £538k AND
Calc V1 fees Yr2 £400k+£90k+£128k / £618k
(C) Uses 25% discount v current discount 26% >

(B) Calc V2 fees Yr1 £576k AND

Calc V2 fees Yr2 £684k (D) Revenue figs provided by FFL / unbiased

(C) Calc Min Fee Adj £12k AND £0 (E) Exclusive agreement assumed >

(F) Other T&C eg geographical market, independent audit

(D) Calc total fees for V1 £1,168k AND V2 £1,260k

R2.SPS.3
Commercial issues
R2.AUI.3
Business issues / wider context (A) T&C require 100% upfront payment of licence fee >

(A) Impact of COVID-19 on the business / fragile economy

(B) Age classification issue / previous 'Jack' film success for FFL >

(B) Nov/Dec are peak sales months

(C) App to be developed >

(C) Licence fees currently 5-12%

(D) Possible restraint of trade "no sales to CH competitors" >

(D) Existing licence arrangements are all on Gross Revenue

(E) Possible extension of contract to include licensed jigsaws >

(E) Previously identified risk re cashflow/liquidity (strategy)

FFL has £2,077k cash OR (F) Losing CH would be detrimental to FFL >
APPLYING JUDGEMENT CONCLUSIONS AND RECOMMENDATIONS

R2.AJ.1 R2.CR.1
Evaluation of licence fee calcs Draws conclusions (under a heading)
(A) CH work will help FFL reach £75m revenue target in 2023 (A) Give licence fee for both bases for V1 AND V2 with figs

(B) V1 lower licence fee than V2 / fees higher with the delay
(B) Concludes on assumptions / impact of delay

(C) Small % difference V1vV2 but significant given falling OP

(C) Concludes on main commercial issue
(D) Licensed products low-margin so unlikely to help GP%/OP%

(E) If forecasts not met, minimum fee adj could be substantial (D) Concludes on choice of version with reason

(F) Any further changes in assumptions will impact calc/decision

eg use existing fee structure, non-exclusivity, discounts

R2.AJ.2
Evaluation of assumptions/film delay
R2.CR.2
(A) Looks reasonable given current split/growth in online OR Makes recommendations
V1 better as online sales increase (as net and gross align)
(A) Negotiate T&C eg reduce fee rate, min fee, exclusivity
(B) Growth seems ambitious / like-for-like sales down OR
No 'Jack' sales after 6 months seems overly cautious
(B) Prepare cashflow to identify cash needs
(C) Minimal impact on overall result

(C) Check manufacturing capacity/timing with suppliers

(D) Forecasts unlikely to be met if miss peak Nov/Dec sales (eg licensed jigsaws)

(D) Discuss with CH: potential delay/film age classification

(E) Consider impact of rumoured agreement with Hamlin / rumoured agreement with Hamlin
eg typical non-exclusive fee is 7%
(E) Contact Gamu re app development
(F) Short timescale (2 months to start / starts Oct 2022)

(F) Other commercial recommendations

R2.AJ.3
Evaluation of commercial issues
(A) Upfront fee: FFL has sufficient (£2,077k) cash
/ historically Oct is a time of declining cash

(B) Without 'under 12' classification game might not be success

(C) App: consider costs / no direct revenue (free)

/ consider impact of possible delay

(D) Likely to be 'unfair contract term' / definition of competitor

(E) Increase FFL's diversity of products / reduce risk Column tota

totall

(F) Contract seems unfavourable to FFL / compare to Hamlin

(Hamlin may have 5yr agreement at 10% net revenue)
 REQUIREMENT 3 - Proposed purchase of heritage games
ASSIMILATING & USING INFORMATION STRUCTURING PROBLEMS & SOLUTIONS

R3.AUI.1 R3.SPS.1
Appendix Calc of max price (appx or report)
(A) Calculations: average of 3 years (A) Adjusted average GP: Y £707k/£802k AND G £550k/£640k

(B) Calculation of GP% (B) Additional admin expenses: £575k

(C) Calc of ave revenue per game (C) Additional distribution expenses £50k

(D) Calculation of sensitivity/scenario analysis (D) Less 10% leeway

(E) Max price as 3 x maintainable GP (own fig)

(F) Max price £1,707k/£2,205k

R3.AUI.2
Calc of GP (report/appendix) R3.SPS.2
Operational and strategic issues
(A) GP: Y average £950k AND
G average £900k (A) FFL no experience of contingent consideration

(B) General downgrade: 10% / Y £95k G £90k (ave)

(B) Lampho is declining after 3 years >

(C) COS: additional 10% / Y £148k G £130k (ave)

(C) Move to UK production may cause disruption >

(D) COS: add'l £1 AND units for G only / £130k (ave)

(either 120, 130, 140 units or 130 ave) (D) Timing: most G sales in Nov/Dec / penalty clause >

NA ID IC SC CC
(E) May be additional costs eg rebranding, promotion

(F) Currently only retail sales >

R3.AUI.3
Business issues and wider context R3.SPS.3
Comments on ethical/trust issues
(A) Impact of COVID-19 on the business
/ fragile economy (A) Figures all provided by YG / YG approached FFL >

(B) FFL has similar games (Panthero & Hoodiddit)

(B) Raj Kambli suggesting artificially lower GP >

(C) FFL has previously bought established games

(eg Lampho) (C) Changing to wooden pieces fits FFL policy >

(D) Penalty for early termination

(D) Current production in Malaysia / which is 10% cheaper >

(E) FFL has £2,077k cash

(E) Article blames Y for increased violence >
APPLYING JUDGEMENT CONCLUSIONS AND RECOMMENDATIONS

R3.AJ.1 R3.CR.1
Evaluates overall financial issues Draws conclusions (under a heading)
(A) Compares calc max price to YG £2.5m proposal (A) Suggests max price (must be <£2.5m)

(B) Ave of £0.8m GP appears unlikely / offer less than £2m

(£0.5m contingent consideration) (B) Concludes on main financial issue

(C) Consider DCF / longer timeframe for appraisal

(C) Concludes on main operational/strategic issue
(D) Scope to inc revenue by selling internationally/apps
/ will help meet £75m revenue target
(D) Concludes on ethical/business trust issues
(E) Considers reasonableness of figures/accounting policies
eg comparison to current H data, COS composition
(E) Concludes on how to respond with reason
(F) Any further assumption changes will impact offer price

R3.AJ.2 R3.CR.2
Operational and strategic impact Makes recommendations
(A) Will boost falling H / 13% of H forecast (A) Clarify basis of YG figures / validate figures
/ in line with launch targets (20variants/10products) / investigate penalty clause

(B) Lampho decline may be repeated with Y&G (B) DD on YG

(C) Other costs of move to UK may be more than 10%

/ compare to experience of previous purchases (C) Negotiate T&C
eg buy only one game, agree who pays penalty
(D) Amount of penalty unknown / unknown who must pay
(D) Understand Lampho decline / differentiate games
(E) Possible sales cannibalisation of existing games

(F) Opportunity to sell games online through FFL website (E) Check supplier capacity / find new supplier in UK
/ opportunity to sell to new retailers

(F) Other commercial recommendations

R3.AJ.3
Evaluation/recs: ethical/trust issues
(A) Possible bias by YG / YG may have own vested interests

(B) Violates FFL principles/ICAEW code of ethics / fraud

/ ethical training for directors on Code of Conduct

(C) Unfair to expect YG to pay for this / same for all formats?

(D) FFL needs to do supplier DD / check eco-credentials

/ need to visit supplier in Malaysia / consider forex Column tota
totall

(E) No evidence for claim / consider impact on reputation

/ investigate facts / might be why games are for sale
FIRST SAMPLE ANSWER AND EXAMINERS’ COMMENTS

The commentary below follows the order and numbering of the script, with reference to the topics
in the marking key. It should be read in conjunction with the review of the Second Sample Answer
and full Examiners’ Report for this session. Page and line numbers have been inserted on the
script for ease of reference and are included where appropriate in this commentary.

Examiners’ comments – overview

This script was well within the top quartile of all assessed scripts. It is a clearly-presented report
which addresses the case requirements as presented and deals with many of the key issues,
offering sound commercial advice where applicable. Overall it has gained sufficient passing grades
(Clearly Competent (CC) and Sufficiently Competent (SC)).

The script earned 32 passing grades across the exam (of which 18 were CC), as follows:

A&UI SP&S AJ C&R Total Max

Review of FFL’s financial performance 2 2 3 2 9 11
Renewal of Clown House licensing arrangement 2 3 - 2 7 11
Proposed purchase of heritage games 3 3 3 2 11 11
7 8 6 6 27

Max 9 9 9 6 33
Executive summary 5 6
Overall Assessment Criteria - 1
32 40

The strong performance over all three requirements indicates excellent overall planning. Weaker
candidates frequently do not leave themselves enough time to do justice to Requirement 3, and only
a small number of candidates ever manage, as this one has done, a full complement of 11 passing
grades on Requirement 3.

Grades were strong across the professional skills, and whilst there was some drop-off on the right-
hand side of the marking key, notably for AJ at Requirement 2, the candidate nevertheless achieved
good AJ and CR grades.

The overall report, including appendices, has comfortably met the main requirements, demonstrating
a strong commercial understanding of the case scenario, sound planning and careful thought. This
indicates a candidate who was focused on the task and who knew the FFL case well.

Executive summary

The executive summary covers the three requirements evenly in terms of length, breadth and depth
of coverage. The key findings have been adapted appropriately from the main report. In all cases
there are synopses of issues, numbers and commercial recommendations.

In respect of FFL’s financial performance, the candidate has concisely summarised the changes in
revenue, both in total and by product type. This is followed by apposite figures and explanations in
relation to gross profit and operating profit, revealing a good understanding of the impact of product
mix and licence fees. The section ends with sound commercial advice on the Huppi issue, followed
by a broad set of overall recommendations logically derived from the foregoing analysis.

On Requirement 2, most of the headline numbers are stated clearly and dissected at the start,
showing that the candidate has thought through the implications of the calculations – a skill that
distinguishes stronger candidates from weaker ones. This is then reinforced by a paragraph
assessing the effect of the proposed minimum fee clause on FFL’s response to Clown House. The
candidate has addressed most of the other key issues, and made some relevant recommendations
but has not commented on cashflow or on the proposed restraint of trade contract term.

© The ICAEW 2022 Page 1 of 4

Coverage of Requirement 3 is again a suitable mixture of figures and narrative. Unfortunately, partly
as a result of a simple calculation error (see below), the candidate has suggested a purchase price
that is outside the acceptable range. Some financial, operational and strategic issues are identified,
notably in respect of the supplier transfer and cashflow, but there are some omissions, eg, there is
no mention of the potential financial impact on FFL’s heritage games portfolio. On ethical aspects,
the executive summary is rather more restrained about Raj Kambli than the main report (again, see
below) and there is a pragmatic solution to the media article about violence.

Overall Assessment Criteria

The script is well structured and laid out. There are lots of paragraph breaks, which make it easier to
read and navigate. The appendices are for the most part clearly presented and easy to follow, with
appropriate headings.

The candidate on the whole uses good professional language but has been penalised for some very
direct and tactless comments about one of the directors at Requirement 3. The disclaimer is also not
complete. Overall, spelling and grammar are of a high standard. There are a couple of irritations that
familiarity with the AI (otherwise so apparent in the script) should have prevented – namely, missing
the distinction between ‘licence’ (noun) and ‘license’ (verb); and writing ‘ClownHouse’ with no space,
though the candidate was not penalised for these. (The abbreviation ‘CH’, introduced in the AI,
would have served as an admirable alternative here. Perhaps the candidate used ‘search and
replace’ but entered the wrong text?)

Review of FFL’s financial performance [Requirement 1]

This part of the report earned 9 passing grades, indicating a very competent piece of work.

Appendix 1 tabulates the key figures clearly, with changes expressed both in absolute terms and
as percentages. Revenue is analysed in total, by product group and by channel, with mix data in
both cases, as well as ‘average price per unit’ for each product group. There is also appropriate
detail on cost of sales, gross profit (GP) and operating profit (OP). Overall, the appendix is an
excellent springboard from which to undertake comprehensive analysis of FFL’s performance.

The narrative begins with a neat comparison of the revenue growth against prior year and FFL’s
own target, as well as a comment on sales volumes – a critical statistic for a full understanding of
FFL’s performance (as should have been apparent to all candidates from the AI commentary in
Exhibit 4). However, the candidate has made the mistake here – and repeatedly in this report
section – of referring to ‘average prices’. Other than for certain individual games, the case
information does not mention specific prices, so what the candidate means is ‘average revenue’,
which is a function of not only price but also the sales channel mix because higher prices are
charged for (the growing number of) online sales.

The analysis of revenue by product group covers all three groups and, for heritage and licensed
board games, the named components of each. The sentences about the new Antis game and
about the existing licensor Ringover are particularly strong. When discussing revenue by sales
channel, the candidate links FFL’s trends with the overall industry pattern mentioned in Exhibit 2 –
one of several shrewd AI references across the script. The candidate reflects sensibly on FFL’s
stated wish to maintain sales to retailers in the current climate, as well as the fact that the
inexorable growth in online sales will soon trigger the need for a systems upgrade.

For GP, there are brief references to changes in individual categories (licence fees; manufacturing
and production) but these could have been further developed – for example, into a consideration of
the lower price being charged by Huppi. The candidate correctly draws attention to the change in
discount on MSRP being given to retailers but could perhaps again have extended the discussion
further. When analysing GP by product group, the candidate skilfully connects licence fees with the
changes in revenue from licensed board games. The attempt here to bring in an AI fact (about
reducing production costs [page 6, line 25]) is perhaps misguided as it is possible if not likely that
the new games will already have had more than one production run.

© The ICAEW 2022 Page 2 of 4

The section on OP is more detailed than on many scripts and overall is very strong. The paragraphs
on promotional costs and product design and development expenditure in particular reveal a deep
understanding of the business model. The candidate has, unfortunately, incorrectly copied the 2021
figure for distribution costs, and so has analysed a larger increase than was actually the case. Also
the ‘reasons’ for the rise in administrative expenses are components rather than reasons.

The request for advice was dealt with adequately, bringing in a range of pertinent case information
(eg, name-checking FFL’s publicity manager mentioned in Exhibit 6; product liability and recall
insurance from Exhibit 12). However, other important anchors could also have been included (eg,
FFL’s ‘SUCCESS’ pledge; BTHA guidelines), as well as more in-depth consideration of supplier
capacity. The comment that Huppi is contributing ‘only … 3%’ [page 7, line 23] of FFL’s costs fails to
recognise that this figure is for only three months, so the ongoing impact would be greater.

The conclusions and recommendations are mostly clear and appropriate. Overall, this part of the
report indicates a candidate with business awareness, knowledge of the case material and an ability
to give logical explanations for movements in financial statements, enabling strong passing grades
all the way across the marking key. It shows what can be done by a candidate who has spent time
assimilating and understanding the challenges faced by FFL.

Renewal of Clown House licensing arrangement [Requirement 2]

Requirement 2 achieved 5 CCs and 2 SCs. The calculations at Appendix 2 are well set out and the
numbers clearly derived – though the candidate could have used a more concise layout. A strong
feature is the inclusion of sensitivity analysis, which appears to have been straightforward to do (the
sequence ‘aannual … annual … annal’ with its repeated typos occurs throughout the various
iterations of the computations, suggesting an effective use of copy-and-paste). There is also a line
showing the phasing of the fee payment in each case; the candidate could have gone on to use this
in a discussion of the cashflow aspects of the agreement but is in fact silent on this altogether. (Note
that the upfront payment date in all instances should be 1 October, not 1 September.)

The candidate has obtained the correct figures for all versions of the fee calculation, providing a
clean sweep of CC grades for the relevant boxes. The candidate has then gone on to comment on
them individually, highlighting the differences and the effect of the minimum fee clause. There are
some comments about the profit that FFL would earn from the arrangement, which was not asked
for and for which there is insufficient information to do a calculation.

The discussion of assumptions covers many of the key points but with some significant omissions.
The candidate rightly notes that a lower discount rate has been used to work out net revenue but
could have gone to point out that the impact on licence fees would be immaterial. The remark that a
reduced licence fee ‘would also apply to smaller delays’ [page 13, line 23] shows the valuable ability
not to think just in black and white. There are also astute words on the Jack the Jackal app (‘ may …
not be ready in time to release on 1 April 2023. This would result in loss of marketing and potential
revenues associated with the product. This would then feed into the lower licence fees …’ [page 13,
line 27]). However, the candidate has not questioned the assumed growth rates, choosing instead to
accept the underlying revenue figures because they were produced by FFL; compared the implied
mix between retailers and online sales – a shame given the focus on this point in Requirement 1; or
considered the seasonality of FFL’s sales and how that might be affected by a delayed film release.

The script addresses a wide range of commercial issues, including the possible move into licensed
jigsaws, the restraint of trade clause being mooted by CH and uncertainty about certification of the
‘Jack the Jackal’ film. The candidate also realises the importance of not creating difficult precedents
when negotiating (‘This is dangerous for FFL because other licensors could also increase their fees’
[page 14, line 14]). However, the critical concept of exclusivity is not covered in enough depth.

Again, conclusions and recommendations are good. In summary, whilst this answer was weaker
than that for Requirement 1, it was still highly competent, showing strong analytical and commercial
skills. The way in which the business and contextual information was incorporated into the
evaluation indicates a candidate well immersed in the case material.

© The ICAEW 2022 Page 3 of 4

Proposed purchase of heritage games [Requirement 3]

This part of the report earned passing grades for all 11 boxes – though most of these are SC: in
some areas, the candidate has done just enough to be classed as competent. In particular, an
error early in the calculations has hampered to an extent the discussion that follows.

At Appendix 3, the calculation is clearly and concisely set out, and again it incorporates sensitivity
analysis (with three separate variations!) Sadly, the candidate has made a slip in the main
calculation by not transferring the figure of £130k (for the additional average cost per Gip game) to
the ‘Total’ column and hence has arrived at an offer price that is higher than the £2.5 million being
proposed by YG and this has slightly blurred the amount that FFL should actually offer. There is
also no calculation of the GP% or of average revenue per game, both of which would have been
the basis for useful comparison with FFL’s own experience and accounting treatments.

In considering the operational and strategic issues, the candidate has made reference to a number
of salient matters overlooked by many others, notably timing (Gip being a highly seasonal product);
the penalty for an early termination of the current manufacturing agreement (page 17, lines 11-12
offer an excellent perspective); the higher distribution costs for products that are sold worldwide;
and the fact that the two games are at present sold only through retailers. Among other strong
comments, the candidate recognises that Gip and Yek can help revive FFL’s flagging heritage
games fortunes but also appreciates that buying them and incorporating them in FFL’s portfolio is
not a simple task: ‘Additional management time associated with … redeveloping them, updating
materials, understanding sales channels etc will be significant [page 17, line 26]’.

When dealing with issues of ethics and business trust, the candidate identifies most of the points
and evaluates most of them appropriately, such as YG’s overall ethos and the article on increased
violence among children, but the change of materials for the Gip product pieces is not fully
considered. There is a long discussion about Raj Kambli’s suggestion of reallocating administrative
expenses to avoid the contingent consideration. This is a somewhat tactless overreaction to what
might just be an innocent idea from a director who lacks accounting knowledge. Unlike many
candidates, however, this one has commented on the likelihood of the contingent consideration
thresholds being achieved [page 17, line 7].

Once more, conclusions and recommendations are good. Overall, the answer covered the issues
very well and, despite the failings highlighted above, was among the very best answers to the
games purchase proposal. It shows what can be done by a candidate who plans the four hours of
the exam so as to have enough time to give Requirement 3 the focus that it merits.

© The ICAEW 2022 Page 4 of 4

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