You work as a trainee ICAEW Chartered Accountant for Maxim Bank (Maxim) in its strategic planning division. Maxim is a large international wholesale and investment bank based in the UK.

On 1 February 2020, a vice president (VP) in the department has sent you the following email:

"I have been informed by the strategic planning division's managing director (MD) that as part of the expansion planning, Maxim has identified a potential acquisition target, Western Bank (Western) which is a small retail bank based in Belfast, UK. We will be preparing a preliminary analysis for the MD to be used in a meeting with Maxim's board next week. I have attached the latest financial statements of Western (Exhibit 1.1) and some further information (Exhibit 1.2). Strictly treat the information provided with utmost confidentiality."

Last night you had a dinner with your parents. Your father who is a partner in an ICAEW audit firm that audits Western has mentioned to you that there is an issue of Western's going concern as a result of understated impairments that will decrease the draft profit figure significantly. Having just received the email from your VP, you are unsure how to proceed.

Exhibit 1.1 : Extract from Rapid's financial statements

Statement of profit or loss for 12 months ending 31 December

2019

'000

2018

'000

Interest income

1,113,700-2019

949,800-2018

Interest expense

(936,150)-2019

(743,650)-2018

Net interest income

177,550-2019

206,150-2018

Fee and commission income

121,050-2019

122,050-2018

Fee and commission expense

(14,300)-2019

(8,600)-2018

Net fee and commission income

106,750-2019

113,450-2018

Revenue

284,300-2019

319,600-2018

Other income

5,100-2019

44,600-2018

Net income/(loss) from financial instruments at fair value through profit and loss

3,200-2019

(2,900)-2018

Impairment charges

(105,850)-2019

(30,050)-2018

Depreciation and amortization

(26,850)-2019

(33,900)-2018

Administrative expenses:

Core administrative expenses

(105,400)-2019

(120,030)-2018

Redundancy provision

(7,200)-2019

(550)-2018

Increase in other provisions

(127,250)-2019

(31,720)-2018

(Loss)/Profit before tax

(79,950)-2019

145,050-2018

Income tax

21,050-2019

(38,750)-2018

(Loss)/Profit for the period

(58,900)-2019

106,300-2018

Statement of financial position at 31 December

2019

'000

2018

'000

Assets

Cash and cash equivalents

1,836,060-2019

1,612,920-2018

Derivatives held for risk management

742,540-2019

866,380-2018

Loans and advances to banks at amortised cost

3,313,950-2019

2,434,750-2018

Loans and advances to customers at amortised cost

26,141,250-2019

24,743,750-2018

Debt instruments at fair value through other comprehensive income (FVTOCI)

6,283,550-2019

5,760,650-2018

Current tax asset

1,000-2019

0-2018

Intangible assets

80,650-2019

42,850-2018

Property, plant and equipment

123,650-2019

120,550-2018

Total assets

38,522,650-2019

35,581,850-2018

Liabilities

Derivatives held for risk management

329,850-2019

806,900-2018

Deposits from banks

10,572,300-2019

3,989,150-2018

Deposits from customers

15,112,400-2019

15,357,500-2018

Debt securities issued

10,786,600-2019

13,712,700-2018

Subordinated liabilities

485,900-2019

333,250-2018

Provisions

248,050-2019

113,600-2018

Other liabilities

42,800-2019

40,350-2018

Total liabilities

37,577,900-2019

34,353,450-2018

Equity

Share capital

100,000-2019

84,000-2018

Share premium

50,000-2019

50,000-2018

Retained earnings

794,750-2019

1,094,400-2018

Total equity

944,750-2019

1,228,400-2018

Total liabilities and equity

38,522,650-2019

35,581,850-2018

Exhibit 1.2: Information about Western

Net income from other financial instruments at fair value through profit or loss relates to non-trading derivatives held for risk management purposes that do not form part of qualifying hedge relationships and financial assets and liabilities designated at fair value through profit or loss. It includes all realised and unrealised fair value changes, interest, dividends and foreign exchange differences.

Other income in the year ended 31 December 2018 represents a reduction in the impairment allowance of 40 million relating to the defaults originally recognised in December 2017. In January 2018, defaults on retail mortgages were offered forbearance terms rather than foreclosing on the loans, therefore impairment losses were reduced, and the loans were moved from stage 3 to stage 2 of the IFRS 9 impairment model.

Impairment charges are calculated by assessing loans on an individual or collective basis depending on the characteristics of the portfolio. Loans and advances are categorised into appropriate risk grades and are placed on a watch list if there are indications of any significant increases in credit risk since origination. Once an indication occurs, for example delayed receipt of amounts due, the loan is classified as stage 2 and the impairment allowance is increased to reflect lifetime expected credit losses.

The increase in provisions relate to redundancies (increase of 7.2 million) and mis-sold insurance redress which has been increased during the current year by 116 million due to a greater number of claims than expected being received by Western.

REQUIREMENTS

A)In relation to the proposed acquisition of Western by Maxim:

1. Carry out preliminary analytical procedures on Western's financial performance and financial position using Exhibit 1.1 to identify any risks associated with the acquisition.(12 marks)
2. Identify and justify any additional information we require at this stage.(4 marks)