ICAN/211/V/C5 Examination No.........................

THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA

PROFESSIONAL LEVEL EXAMINATION – MAY 2021

CASE STUDY

EXAMINATION INSTRUCTIONS
PLEASE READ THESE INSTRUCTIONS BEFORE THE COMMENCEMENT OF THE PAPER

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have prohibited items such as telephone handset, electronic storage device,
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and liable to further disciplinary actions including cancellation of
examination result if caught.

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3. Do NOT write anything on your question paper EXCEPT your examination

number.

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5. Read all instructions in each section of the question paper carefully before
answering the questions.

6. All solutions should be written in BLUE or BLACK INK. Any solution written
in PENCIL or RED INK will not be marked.

7. Your solutions MUST BE on the CASE STUDY answer booklet.

THURSDAY, MAY 6, 2021

DO NOT TURN OVER UNTIL YOU ARE TOLD TO DO SO

 THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA

PROFESSIONAL LEVEL EXAMINATION – MAY 2021

CASE STUDY

Time Allowed: 4 hours (including reading time)

INSTRUCTION: YOU ARE TO USE THE CASE STUDY ANSWER BOOKLET FOR THIS
PAPER

This case material is issued prior to the examination to enable candidates

familiarise themselves with the case scenario and to undertake any research and
analysis as necessary. This pre-seen part of the Case Study examination is also
published on the Institute’s website: www.ican.org/students.

Candidates MUST NOT bring this case material to the Examination Hall. On receipt
of the material, candidates are to spendfew days to the examination to familiarise
themselves with the information provided, carry out additional research and
analysis about the industry and analyse the financial information provided in
preparation for the examination. Candidates should note that the use of pre-seen
part of the Case Study will not significantly help them in their preparation for this
examination. It is essential that they carry out adequatestudy and analysis on their
own in order to have a good understanding of the pre-seen part of the case
scenario.

At the start of the examination, candidates will receive the complete case scenario
which includes both the pre-seen and the unseen and the examination
requirements. Candidates must use the answer booklet provided by ICAN in the
Examination Hall. Any solution presented with other papers WILL NOT be assessed.

Assessment of the Case Study

The marks in the Case Study examination are awarded for professional skills and
are approximately allocated as follows:

 Assimilating and using information 20%

 Structuring problems and solutions 20%
 Applying judgement 20%
 Drawing conclusions and making recommendations 20%
 Demonstrating integrative and multidisciplinary skills 10%
 Presenting appropriate appendices 10%

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Of the total marks available, approximately 10% is allocated to the relevant
discussion of ethical issues within your answer to the requirements. Although
ethical issues do not form a specific requirement, as this has been deemed to have
been tested in other subjects of the professional examination, but will be tested
within a requirement which may include the following areas:

 Lack of professional independence or objectivity;

 Conflicts of interest among stakeholders;
 Doubtful accounting and/or creative accounting practice;
 Unethical business/commercial practice; and
 Inappropriate pressure to achieve a reported result.

Candidates should note that marks are not awarded for simply restating facts from
the case scenario but are awarded for demonstrating professional skills and
technical depth. Therefore, to succeed, candidates are required to:
 Show sufficient evidence of knowledge of the case scenario;
 Be able to carry out appropriate analysis of the issues involved and suggest
feasible solutions to the problems identified;
 Demonstrate ability to make informed judgement on the basis of analysis
carried out; and
 Generate reasoned conclusions upon which relevant recommendations are
made.

A candidate that omits any one of these will have a slim chance of success in the
examination.

May 2021 Case Study: OGA Specialist Hospital Limited

List of exhibits
1. About you (Joseph Chima) and your employer, OGA Specialist Hospital
Limited.
2. Health care in Nigeria: Opportunities and challenges.
3. OGA Specialist Hospital Limited.
4. OGA Specialist Hospital Limited’s information system.
5. OGA Specialist Hospital Limited: Management accounts 2017 – 2019 and
2020 budget.
6. Correspondence from Iwalola to Joseph Chima – FCT OGA Hospital.
7. Summarised capital budget.

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 Exhibit 1
About you (Joseph Chima) and your employer, OGA Specialist Hospital Limited.

You are employed as a Financial Analyst at the head office of OGA Specialist Hospital
Limited which has three hospital units within the Lagos metropolis. You report to
Deborah Iwalola, Finance and Administration Director. Your responsibilities include:

 Preparing detailed financial analyses and reports on the performance of the

hospital;
 Analysing the hospital’s financial statements to identify areas of weakness and
proffering likely solutions to correct the anomalies;
 Assessing operational and strategic business proposals to see how each aligns
with the hospital’s objectives and its impact on its business and financial risks;
 Assessing the hospital’s financial and business forecast together with the
assumptions upon which they are based to form judgements and
recommendations to the board; and
 Drafting reports for the finance and administration director to be submitted to the
board on the result of the hospital’s financial, operational and strategic business
analyses you have carried out.

Your responsibilities demand that you keep yourself abreast with the healthcare
industry, both nationally and internationally, so as to be able to carry out the above
tasks effectively.

Exhibit 2
Healthcare in Nigeria: Opportunities and challenges

Health, according to World Health Organization (WHO) in 1948, is described as “a

state of complete physical, mental and social well-being and not merely the absence
of disease or infirmity.” By implication this involves a feeling of well-being that is
enjoyed by an individual when the body systems are functioning effectively and
efficiently together and in harmony with the environment in order to achieve the
objectives of good living (World Health Organisation (WHO))

Healthcare in Nigeria
Of all the industries in Nigeria, healthcare is the most pluralistic, as it is split between
the public and private sector. According to the World Bank, 3.6% of Nigeria’s GDP is
spent on healthcare, thereby putting the healthcare market (both public and private)
at approximately $14.6 billion. Healthcare in Nigeria is mainly driven by the public
sector. Currently, 66 percent of the country’s 34,000 health facilities are owned and
run by the government.

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The private sector is comprised of clinics, hospitals, diagnostics centres, pharmacies,
and multi-specialist hospitals that provide a more premium service (compared to the
public sector facilities) to those who can afford it.

The private health sector accounts for 70 – 75% of the total health expenditure in the
country, meanwhile, most of the larger health care facilities with over 100 beds are
inadequately-funded public sector facilities (curled from Pharmaceuticals &
Healthcare in Nigeria: General Overview and Opportunities by Nifemi Aluko (2018).

Structure of Nigeria public healthcare system

Nigeria’s public healthcare system is overseen and managed at three distinct levels.
The federal government is responsible for tertiary care, which is mainly provided by
university teaching hospitals and federal medical centres. Nigeria’s 36 states and the
federal capital territory of Abuja are each responsible for their own secondary care
facilities, mainly in the form of general hospitals, while the 774 local government
areas focus on primary health care that is administered primarily through
dispensaries. On the surface, the clear delineation of responsibilities by hierarchy
should result in greater accountability and fit-for-purpose provision. However, critics
of this three-tiered structure argue that it has resulted in budgetary leakages, overlap,
inefficiencies and blame passing.

Generally, the healthcare system is characterised by a marked discrepancy in the

availability and quality of services between private and public facilities and between
urban and rural areas. Also, the tertiary and general hospitals tend to be overcrowded
because the primary health care centres are functioning below average.

Nonetheless, significant progress has been made in the reduction of life-threatening

infectious diseases and there has been an improvement in the performance of key
health indices (curled from Opportunities for private companies in Nigeria’s Health
care sector, and efforts to improve provision by Nigeria, by Oxford Business Group:
Nigeria Health Overview, viewed online from oxfordbusinessgroup.com and
Healthcare Sector in Nigeria: a General Overview by Nigerian Finder, viewed online).

Challenges of public healthcare system in Nigeria

One of the major challenges with healthcare delivery in the country is budgetary
allocation which has been hovering between 5 to 6% of the country’s annual budget.

Although the allocation to health is one of the highest, based on value, it is believed
that the amount is still far less than what is needed. Also, when compared to the 2001

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Abuja declaration where Nigeria and 21 other African nations pledged to commit 15%
of their federal budget towards health needs, this is a far cry.

The lack of quality facilities in the country has led to an increase in medical tourism
with Nigerians spending as much as $2 billion per annum on outbound medical
tourism. The number of Nigerians leaving the country to seek medical treatment
abroad is increasing, and this is having a significant impact in terms of lost revenue
on the Nigerian economy. The authorities have said that tens of thousands of
Nigerians travel every year to the US, UK, India, and other parts of the world to seek
treatment for medical issues ranging from kidney transplants, open heart or cardiac
surgeries, neurosurgeries, cosmetic surgeries, orthopaedic surgeries, eye surgeries and
other health conditions, and even delivering babies. Nigeria’s Health Ministry says it is
building several world-class health centres to address the issue.

Opportunities for private participation in healthcare delivery

There are both short-term and long-term opportunities in this market, as more
consolidation occurs with the private healthcare facilities to establish bigger, well-
equipped facilities to match the medical demands of Nigerians. Recently, there has
been a rise in HMOs (health insurance service providers), as most patients continue to
pay out-of-pocket for services; 72% of total health expenditure is currently out-of-
pocket expenditure.

Some of the other short-term opportunities include the supply of properly designed
medical devices and equipment to establishments that need these devices and are
willing to take on these capital expenditures. Furthermore, foreign entities have the
opportunity to capitalise on Nigerians’ trust of foreign healthcare systems, as an
interested client base already exists (curled from Pharmaceuticals & Health in Nigeria:
General Overview & Opportunities by Nifemi Aluko (2018).

With rising levels of disposable income among some segments of society, there is
greater demand for private coverage. According to Dr. Abiodun Fatade, “Public
hospitals are overstretched and under-funded, which drives down quality and lowers
standards. Private hospitals provide patients with a faster, more effective option,” Dr
Abiodun Fatade, the CEO of Crestview Radiology, told OBG (curled from opportunities
for private companies in Nigeria’s health care sector, and efforts to improve provision
by Nigeria, by Oxford Business Group: Nigeria Health Overview, viewed online).

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The introduction of the national health insurance scheme which requires both public
and private sectors organisations with 10 or more staff members to contribute 10% of
their employees’ base salaries to the scheme will provide more opportunities to the
populace to seek quality medical treatment from private healthcare providers.

Exhibit 3
OGA Specialist Hospitals Limited
Company History

OGA Specialist Hospital Limited was founded in 1986 by three friends, Professor John
Olayemi, Professor Shehu Garba and Professor Andrew Arochukwu. All are professors
of medicine and had worked previously at Federal Teaching Hospital in Lagos. The
vision of the three friends is to have a chain of hospitals that is the first choice for
healthcare solutions of international standards in Nigeria. Therefore, OGA’s message to
Nigerians is, “we are committed to clinical excellence and patient care, which is our
driving force in the improvement of human life. This forms a big part of our
motivation, striving to deliver quality, cost-effective healthcare to the people we
serve”

Nature of Business
OGA Specialist Hospital Limited (OGA Hospital) currently has three hospital units
within the Lagos metropolis and planning to have a branch of the hospital in Abuja.
The hospital, from inception is planned to cater for the high class of the society, most
especially, corporate executives, expatriates and upcoming professionals who value
healthcare delivery and could afford the cost of a specialist treatment. In Lagos, the
hospital has a total of 450 general ward beds and 50 intensive care unit (ICU) beds.
The general beds comprise 120 private wards and 330 wards each with at least 2
patients at a time. The wards are distributed among the three hospitals in Lagos as
follows:
 Lekki – 50 general wards and 60 private wards;
 Ikoyi – 100 general wards and 40 private wards; and
 Ikeja – 180 general wards and 20 private wards.

The intensive care units are distributed as follows: 10 each in Lekki and Ikoyi; and 30
in Ikeja.

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About 80% of OGA Hospital patients are registered under Health Management
Organisations (HMOs) and their bills are settled by these HMOs, while the balance are
individuals who settle their bills during each visit. The three hospital units in Lagos
(Including the pharmacies and laboratories located in each) operate as divisions of the
same company and are not incorporated as separate companies.
OGA hospitals offer the following specialties:

 Cardiology;
 Critical care;
 Dermatology;
 Endocrinology;
 Gastroenterology;
 General surgery;
 Internal medicine services;
 Neonatal care;
 Nephrology;
 Neurology;
 Obstetrics and Gynaecology;
 Ophthalmology clinic;
 Orthopaedic and trauma;
 Emergency services; and
 General out – patient department.

OGA Hospital has relationship with all the major health management organisations in
Nigeria. HMOs have the power to influence where patient care occurs. Tariffs are
negotiated annually with these HMOs with regard to charges for the forthcoming year
for care to be provided to insured patients. The vast majority of patient bills are settled
directly by the HMOs and hence relationship with the HMOs are critical to the on-going
success of the hospital. OGA is fortunate that it has a well-established reputation with
most HMOs for providing high-quality healthcare services while keeping medical costs
under control.

OGA owns the properties from which its hospitals operate.

Revenue Model
OGA charges for patient care according to two different models:
Fixed fee flat rate – a flat rate for specified treatments where the expected course of
treatment is highly predictable. The fixed fee for service includes the theatre cost,
pharmaceuticals, surgical supplies, laboratory investigations, equipment usage and

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ward fees. In this revenue model, OGA bears the risk of deviations in the cost of
surgical procedures (except for the price of pharmaceuticals and laboratory
investigations).

Flexible rate – OGA charges the patient for all the costs of care, including ward fees,
theatre charges, equipment usage, pharmaceuticals, laboratory investigations and
surgical supplies used. OGA bears no risk relating to the length of stay of patients or
the cost of surgical procedures.

Approximately 50% of OGA’s revenue is derived from fixed rate arrangements and the
balance from flexible for service arrangements.

Shareholders and Directors

The shareholders of OGA at 31 December 2020: Shareholders and % shareholding
Prof. John Olayemi 33.33%
Prof. Shehu Garba 33.33%
Prof. Andrew Arochukwu 33.34%
100.0%

The directors of OGA are as follows:

Prof. John Olayemi Chairman/Chief Executive Officer
Prof. Shehu Garba Executive Director
Prof. Andrew Arochukwu Executive Director
Dr Philip Andrea Chief Medical Director
Mrs. Deborah Iwalola Finance and Admin Director
Dr David Ezeoke Chief Laboratory Technologist

Competitors
There are six major competing hospitals around Lagos with similar facilities like that of
OGA hospitals. These are:
 St. Nicholas Hospital;
 Reddington Hospital;
 Eko Hospital;
 First Consultant Hospital;
 St. Ives; and
 Lagoon Hospital.

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These hospitals are able to negotiate preferred network arrangements with the health
management organisations and attract higher volumes of patient admissions.

However, OGA hospitals have been adjudged, both nationally and internationally, to
be the best hospital in Nigeria. OGA is the only Nigerian hospital accredited by the
Joint Commission International, and one of two in Sub – Saharan African to be so
accredited.This is a guarantee of safe and quality healthcare that meets international
standards.

Future Plan
At the June 2020 board meeting a proposal to establish a 100-bed facility in Abuja,
the Federal Capital Territory (FCT), located on property that will be acquired by OGA
Hospital, was evaluated. It was noted that the hospital would require a licence from
the Federal Ministry of Health and the FCT Municipal Council before it can commence
operations.

The board of directors of OGA Hospital resolved that Deborah Iwalola be tasked with
preparing a capital budget for the proposed hospital to evaluate the potential
financial returns thereof. Prof. Olayemi has indicated that the new hospital could
leverage on the existing head office infrastructure and the only additional costs of
running the new hospital would be the direct administration and operating costs.

Exhibit 4
OGA’s information system

Most of OGA’s accounting and administration functions are performed at its head office
in Victoria Island. However, each hospital is responsible for patient admissions and
discharges, usage of consumables and theatre, laboratory and pharmacy operations.
As many of these transactions are first recorded on paper-based source documents,
such data have to be captured onto the computer system by employees at the
hospitals. Thereafter all hospital-related transaction data are uploaded in batches to
the head office information system every night. Once uploaded, the data are processed
to the company’s computerised accounting records and used, amongst others, for the
billing of patients.

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From the Minutes of the October, 2020 board meeting it is apparent that the board of
directors of OGA is becoming increasingly anxious about the efficiency and
effectiveness of the current information system. The following points were specifically
noted:

 The current system is labour intensive and involves the duplication of processes. A
system which facilitates the following is therefore considered essential:

 The centralisation of patient data (which will remove the need for patients to
complete patient administration forms on repeat visits and also enhance the
inpatient care provided); and
 The real-time and paperless capturing and processing of details relating to
patient hospital stay, dispensing of pharmaceuticals, laboratory investigations,
theatre activities and use of surgical supplies.

 Health management organisations are demanding more information from

hospitals to enable them to manage their healthcare costs, but with the current
information system this cannot be provided as it is not readily available from the
system.

The CEO of OGA, Prof. John Olayemi, has previously worked with an enterprise
resource planning (‘ERP’) system in a hospital environment and noted the following
key benefits of such systems:
 The centralisation of information for all the hospitals and departments of each
hospitals;
 Centralisation of patient information database that can be assessed for the
purpose of information sharing amongst doctors and consultants which will lead
to improvement in patient care;
 Centralisation of human resources management throughout the hospital for staff
mobility, training and management;
 Overall reduction in operational costs as a result of real life processing of different
tasks, such as admissions, discharges, capturing of facility usage and billings; and
 Improved in patients’ reception management by having real-time information on
bed availability, doctors’ schedules and patient locations.

Prof. Olayemi plans to seek approval from the board of directors of OGA to task a
group of suitable OGA employees to perform a feasibility study regarding the possible
introduction of an ERP system. However, the implementation of the new system (if
approved) is only likely to take place at some point during 2021 financial year.

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 Exhibit 5
OGA specialist Hospital Limited
Management accounts and budget
December year end Actual Actual Actual Budget
2017 2018 2019 2020
N’m N’m N’m N’m
Income Statement Revenue
Theatre 348 361 371 409
Accommodation 389 410 440 488
Pharmaceuticals and surgical supplies 295 301 333 359
Equipment income 110 115 119 131
Laboratory 55 63 71 85
1,197 1,250 1,334 1,472
Other income 8 9 9 10
Pharmaceuticals and surgical supplies (265) (274) (296) (323)
Laboratory supplies (14) (16) (18) (22)
Direct operating costs:
Employee costs (403) (414) (446) (485)
Catering (29) (32) (35) (39)
Laundry (7) (7) (8) (9)
Indirect operating costs:
Premises maintenance (74) (80) (86) (93)
Cleaning (26) (28) (30) (32)
Electricity and water (15) (17) (19) (22)
Other indirect costs (67) (72) (77) (83)
Administration costs (91) (98) (105) (112)
EBITDA 214 221 223 262
Depreciation (34) (37) (37) (38)
EBIT 180 184 186 224
Interest income 1 1 1 -
Finance charges (9) (9) (7) (5)
Profit before tax 172 176 180 219
Tax (55) (56) (58) (70)
Profit for the year 117 120 122 149

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OGA Specialist Hospital Limited
Management accounts and budget
December year end Actual Actual Actual Budget
2017 2018 2019 2020
N’m N’m N’m N’m
Statement of financial position
Non-current assets
Leasehold building 38 37 33 30
Medical and other equipment 149 144 140 143
Motor vehicles 3 3 3 2
190 184 176 175
Current assets
Inventories 18 20 23 22
Trade receivables 119 117 138 133
Other receivables 42 43 44 43
Cash and cash equivalents 30 29 2 6
209 209 207 204
Total assets 399 393 383 379
Share capital 25 25 25 25
Retained earnings 122 152 174 211
Total equity 147 177 199 236
Non-current liabilities
Hire purchase liabilities 79 55 29 -
Bank loan 37 19 - -
Deferred taxation 11 11 11 11
127 85 40 11
Current liabilities
Trade payables 47 50 59 62
Accruals and value added-tax 24 26 27 28
Provisions 9 9 9 9
Income tax liabilities 4 3 4 4
Short-term portion: Bank loan 19 19 19 -
Short-term portion: Hire purchase 22 24 26 29
125 131 144 132
Total equity and liabilities 399 393 383 379

Notes on the income statements:

(1) Cateringand laundry expenses are in respect of accommodation;
(2) Employees expenses are allocated as follows:
Theatre 45%
Catering 20%
Pharmacy 30%
Laboratory 5%
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Notes to the budget:
(1) Equipment income is in respect of charges for using specialised equipment
during surgery and post operation care.
(2) Other income is in respect of rent collected from coffee and snacks vendors who
leased space on the hospitals’ premises.
(3) The budget is predicated on the continuing outsourcing of catering, laundry and
cleaning services in the hospitals. While catering charges varies depending on
the occupancy levels per day, laundry and cleaning services are paid fixed
amount per month in respective of activity levels in the hospitals.
(4) Electricity and water cost is approximately 80% variable.
(5) Other indirect costs and administration costs are generally fixed in nature.

Exhibit 6
Correspondence from Iwalola to Joseph Chima
From: Deborah Iwalola
Sent: 1 March, 2021
To: Joseph Chima

Subject: FCT OGA Hospital

Dear Joseph,

I know you are under work pressure but there is another issue on which I need your
input. The board is seriously considering starting a branch in the Federal Capital
Territory (FCT) next year. What I need from you is to review the attached Excel
spreadsheet (exhibit 7) to ensure that I have prepared it in a technically correct
manner and have not missed any issues.

I compiled the Excel spreadsheet (exhibit 7) based on the information provided by an

independent hospital expert that we use from time to time. The board wants some
preliminary feedback by next Wednesday, so you may have to do a bit of work this
weekend.

We may have to calculate the breakeven revenue for the board on the new hospital.
They will probably want to know when this venture will start making profits and how
sensitive profits are to revenue levels. Perhaps give that some thought too.

Anyway, happy reading and I look forward to your inputs next week.
Regards

Deborah

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 Exhibit 7

Summarised capital budget Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6
Acquisition of property, including (70.0) 0 0 0 0 0 0
Transfer duty
Licence application and consulting (9.0) 0 0 0 0 0 0
fees
Licence application and consulting fees (9.0) 0 0 0 0 0 0
Renovations to existing building 0 (50.0) 0 0 0 0 0
Borrowing costs: Land and buildings 0 (16.2) 0 0 0 0 0
before opening
Medical and theatre equipment 0 (100.0) 0 0 0 0 0
purchased
Revenue* 0 53.78 230.2 307.88 395.32 493.5 528.04
Pharmaceuticals and surgical
supplies 0 (10.76) (46.04) (61.58) (79.06) (98.7) (105.6)
Direct opening costs 0 (59.0) (63.14) (67.54) (72.28) (77.34) (82.76)
Indirect opening costs 0 (52.2) (56.18) (60.1) (64.32) (68.82) (73.64)
Administration costs 0 (48.0) (51.36) (54.96) (58.78) (62.92) (67.32)
Head office costs 0 (15.0) (32.10) (34.34) (36.76) (62.92) (67.32)
Depreciation 0 0 0 0 0 0 0
Finance charges 0 (10.8) (9.0) (7.02) (4.88) (2.54) 0
Net cash flow from operations (79.0) (308.48) (27.6) 22.34 79.24 143.86 156.66
Annual revaluation of land and
buildings 0 7.2 7.64 8.08 8.58 9.08 9.64
Sale of business (5 x EBITDA in year 6) 0 0 0 0 0 0 0
Net cash flow (79.0) (301.28) (19.98) 30.42 87.82 152.94 949.54
*Assumes hospital will be in operation
during the last half of year 1
IRR
NPV @ 12% hurdle rate
ASSUMPTIONS Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6
Number of surgeries 14,940 59,760 74,700 89,640 104,580 104,580
Maximum capacity for parties 149,400 149,400 149,400 149,400 149,400 149,400
Average fixed fee per patient N3,600 N3,852 N 4,122 N4,719 N4,719 N5,049

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