Question 2a ii

You are a manager in Lapwing & Co. One of your audit clients is Hawk Co which operates commercial real estate properties typically comprising several floors of retail units and leisure facilities such as cinemas and health clubs, which are rented out to provide rental income.

Your firm has just been approached to provide an additional engagement for Hawk Co, to review and provide a report on the company’s business plan, including forecast financial statements for the 12-month period to  31 May 2013.

Hawk Co is in the process of negotiating a new bank loan of $30 million and the report on the business plan is at the request of the bank. It is anticipated that the loan would be advanced in August 2012 and would carry an interest rate of 4%.

The report would be provided by your firm’s business advisory department and a second partner review will be conducted which will reduce any threat to objectivity to an acceptable level.

Extracts from the forecast financial statements included in the business plan are given below:
Statement of comprehensive income (extract)

note forecast
12 months to
31 may 2013
$'000
unaudited
12 months to
31 may 2012
$'000
revenue 25000 20600
operating expenses -16550 -14420
---------- ----------
operating profit 8450 6180
profit on disposal of beak retail 1 4720 ----
finance cost -2650 -1690
---------- ----------
profit before tax 10520 4490
======= =======
statement of financial position
note forecast
31 may 2013
$'000
unaudited
31 may 2012
$'000
assets
non-current assets
property plant and equipment 2 330150 293000
current assets
inventory 500 450
receivables 3600 3300
cash and cash equivalent 2250 3750
---------- ----------
6350 7500
---------- ----------
total assets 336500 300500
======= =======
equity and liabilities
equity
share capital 105000 100000
retained earnings 93400 92600
---------- ----------
total equity 198400 192600
---------- ----------
non-current liabilities
long term borrowings 2 82500 52500
deferred tax 50000 50000
current liabilities
trade payables 5600 5400
---------- ----------
total liabilities 138100 107900
---------- ----------
total equity and liabilities 336500 300500
======= =======

Notes:

1. Beak Retail is a retail park which is underperforming. Its sale is currently being negotiated, and is expected to take place in September 2012.

2. Hawk Co is planning to invest the cash raised from the bank loan in a new retail and leisure park which is being developed jointly with another company, Kestrel Co.

Required:

In respect of the engagement to provide a report on Hawk Co’s business plan:

Recommend the procedures that should be performed in order to examine and report on the forecast financial statements of Hawk Co for the year to 31 May 2013. (13 marks)