Pass In Training

A large number of tutor firms continue to state one of the following misconceptions on appling judgement

• It's the most important column on the marking key
• It's a lottery in terms of "guessing" the points / you need to get lucky on the day

Applied Judgement is neither the most important column on the marking key nor is it a lottery. It is, however, the most tricky column to score well on in all Requirements. 

We go into detail in this course on what constitutes applying judgement, and it is certainly worth a read.

Revenue is normally assessed with one SPS and one AJ box. You will gain credit within the SPS for commenting on the movements of each revenue stream with basic analysis. However, it is often difficult to know the points which will be in the AJ column. In this particular exam, there are certain points which could be deemed AJ or SPS, for instance trends. There are marking keys where trends are given within SPS and other's where the same mark is deemed to be Applying Judgement.

If you have not already done so, you should read our Steps To Pass In Case course as we go into details as to what constitutes applying judgement for the case study exam.

Revenue Points (in our estimated order of likelihood of being an AJ point)

• MS: MS growth / decline due to volume rather than price change - The last price change helped generate growth in 2018 and 2019, with little overall movement in volume. However in 2020, we the year where there will be no financial benefit remaining from the 1 Oct 17 increase. This means ANY change in MS revenue must be due to circulation change OR a change in the effective price.
• MS: The effective price is less likely to change compared to volume. However, keep a check on this as the EP, whilst being linked to Cover Price (an increase in Cover Price should increase EP), can move independently from the cover price. The EP could decrease if more discounting is offered to subscribers and yet the cover price has not changed.
• MS: Second half of the year changing circulation rates due to COVID-19. We don't know if these will decline or increase, whether corporate subs will decrease or if the balance between printed and online will change. All of these factors could impact the results for the second half of the year. To be able to comment on this, you will need to CAREFULLY read the new exhibits on the day of the exam and clearly state what the impact has been due to COVID-19
• MS: Trend - There has been an accelerating upward trend since 2016, which is as expected due to the price rise on 1 Oct 17. However, it is highly likely the trend will slow and could possibly decline in 2020. You MUST word your trend wording correctly e.g. "MS revenue has decreased by £xx (yy%) to £zz due to a decrease in subscriptions and circulation. This decrease reverses the trend of accelerating growth since 2016, which had been driven by the 2017 price increase."
• AD: Comparing performance against expectations: We are anticipating AD revenues to decline, and potentially by a large amount. The reasons for this includes the general industry decline, the impact of COVID-19 (10% decrease expected in April / May 2020) and there is a possibility the Beal Events in April and August are cancelled. One of the first AJ points is therefore to compare the actual performance of AD against the fact we are expecting a large decrease. A decrease of say 5% would be a lot less than expected or 10% is likely to be in line with expected, whereas 15% may be worse than expected. If the stream has improved or has not declined as much as expected, make sure you give the reason if the examiner has provided you with this e.g. "due to a large new contract with ABC Limited."
• AD: Comparing against circulation figures e.g. AD has decreased significantly despite circulation figures remaining above the 2m level, deemed critical for advertisers.
• AD: Trends - The current trend is that revenue is decreasing at a relatively consistent rate since 2017 and you will therefore need to compare the 2020 change against this trend. "....continuing the downward trend experienced since 2016, although at an increasing rate of decline.
• AD: Performance against other streams:  It is most likely AD will be the worst performing stream. Therefore you need to state this in your analysis. We have seen marking keys with Best / Worst performing streams considered an AJ mark. You must use the correct terminology. as "AD has performed poorly" would not be sufficient as this gives no context compared to the other streams.
• SR: We expect SR to increase as more work is commissioned. Additionally, the COVID-19 reports, the fact they do commissioned work for the NHS and OBR is hinting there may be more work due to COVID-19. Again, comparing against expectations could give you credit on the key.
• SR: Trends - Increasing trend, although the growth rate between 18 and 19 declined slightly. Therefore if 2020 is higher than the 2019 growth rate, your comment should be "..continuing the strong growth since 2016 and at an increasing rate compared to 2019". If the growth rate continues to reduce then you would comment "...continuing the upward trend of growth since 2016, although at a decreasing rate since its peak growth rate in 2018."
• Mix: If MS falls under 50% of revenue, then this is likely to be an AJ point.

Gross Profit / COS

• Sales Mix - The decline in AD has been offset by the growth of SR. The issue going into 2020 is that SR growth has COS attached to it with an increase in Contributor costs. AD has few cost of sales related to it. Therefore "Overall GP margin has decline to yy% due to the sales mix changing. AD, with few COS is a smaller proportion of the mix, being replaced by SR which has associated Contributor costs".
• Contributor costs - Comparing the movement against revenue change "Has increased at a faster rate than revenue reducing GP margins"
• Contributor costs - Comparing the movement against MS AND SR revenue change (remember that MS and SR share contributor costs). "However, the cost increase is lower than the change in MS and SR revenue, meaning the costs are controlled compared to the revenue which they best relate to".
• Production costs - You need to consider that these costs are relatively fixed compared to circulation / MS revenue costs. They move in bands of circulation (Stepped Fixed Costs). Mentioning that these costs are "outsourced with costs fixed within circulation bands"
• Fixed cost base for MS - Demonstrating that you understand the contributor costs and production costs are incurred regardless of the circulation figures is important for you to state "The cost of sales related to MS do not vary with the volume of circulation and the decline in volume will reduce overall gross profit margins"
• Trends - GP% has decreased during the year, continuing the trend since margins peaked in 2018, although they remain higher than before the last price increase in 2017.

Cash flow / Balance Sheet

• Debtor Days - If these have increased, then likely to be due to the change in sales mix and more specifically Public Sector SR clients which have 60 day terms. Linking the movement into the Public Sector work (especially if the examiner has stated that work with the NHS / OBR) has increased, is likely to be AJ
• Overdraft Limit - Commenting on the overdraft headroom e.g. "Overdraft has reduced during the year, increasing the headroom to its maximum £200k level"
• P&E - Comment on the 2020 spend compared to 2019 / 2018 levels.

Final Thoughts

Whilst we have provided the general themes which we believe could help you gain the AJ marks in R1, you MUST remember to tailor your answer to the new information the examiner has given you.

You can use this list as a prompt, but Beal is a case study where it is very difficult to work out how the figures will move and the reasons for this.