Summary of Reacquired Franchise Rights Essay Sample

It has come to our attending that much of Roman Holiday’s recent gross growing came from acquisition of franchise right and bing eating houses instead than existent growing in the franchise. Management is cognizant of these issues and may be experiencing some force per unit area to run into growing marks and net incomes prognosiss. In the undermentioned working documents. we address this possible issue by reexamining the assorted accounting interventions for the reacquired franchise rights. We besides examine the reacquired franchise rights from the Arizona acquisition and measure the rationality of management’s premises in its impairment analysis. Q1

Purpose: The intent of this testing process is to verify the mathematical truth of the agenda and accommodate the sum to the preliminary balance sheet to guarantee the averments of truth and rating are met.

Audit Procedure:
1. Obtain the client prepared agenda of reacquired franchise rights during the twelvemonth. 2. Trace and agree all sums to last twelvemonth working paper. 3. Trace and agree book value of reacquired franchise rights to respective impairment analysis agenda to guarantee no damage losingss. 4. Recalculate the balance at terminal of the twelvemonth to verify that the right sum is calculated. 5. If the balance at terminal of the twelvemonth is non right calculated. accommodate the entire balance at terminal of the twelvemonth to the reacquired franchise right sum on the preliminary balance sheet. Working paper see appendix 1.

Decision:
There is a 2000 difference between the recalculated balance at terminal of the twelvemonth 127. 414. 000 and the client recorded balance of 127. 412. 000. The difference is manner below the materiality which is 5 million. therefore the difference is immaterial. Based on the audit processs performed. the agenda of reacquired franchise rights is mathematically accurate. Q2

Purpose: to measure the rightness of the client’s finding of an indefinite life categorization for the reacquired franchise rights. and whether it is consistent with SFAS142. Analysis:

In the past few old ages. Roman Holiday was reacquiring rights for bing eating houses and/ or undeveloped markets. The grounds for these acquisitions are varied and include taking over ill executing eating houses to protect the company’s trade name name and to preserver the value of the local market. Reacquisitions besides take topographic point for strategic hard currency flow direction intents whereby puting current free hard currency flows in the reacquisition yields the outlook of replacing franchise royalties with the larger net incomes from the eating houses themselves. Company about ever pays some premium related to the contractual component of the franchise right that is capitalized as an intangible plus. However. it must be noted that the categorization and nature of the intangible plus varies well. Roman Holiday defined reacquired franchise rights as “the surplus of the net sum assigned to identifiable assets and liabilities recorded upon the acquisition of franchise markets. ” It was classified as an intangible plus with an indefinite life.

The reacquired franchise rights takes over 29 % of Roman Holiday’s entire plus and the complicities in the categorizations introduce important hazards of material misstatement in the company’s fiscal statements. The categorization should be critically assessed in order to guarantee the just presentation of the company’s fiscal statement. Based on SFAS No. 142 provinces good will and intangible assets that have indefinite utile life will non be amortized but instead will be tested at least yearly for damage. And the intangible assets that have definite utile life should be amortized. The categorization and the nature of intangible assets vary significantly in the quick-service eating house industry and frequently depend on the company.

We will establish our analysis by SFAS No. 142. Standards of SFAS No. 142 to find the utile life of the intangible plus is quoted in the appendix 2. There is no expected usage of the reacquired franchise rights ; for competitory. even though Roman holiday merely occupied less than 5 % of the US market ; it targets specific clients who are willing to pay premiums. For Roman vacation. it is seeking to make a niche. The fight is less than the companies whose scheme is cost leader. And after the fiscal crisis of 2009. as for 2012. the market is warming up. the defect of the crisis is melting off. the demand will non be affected. So there is no legal. regulative. contractual proviso competitory. economic. or other factors limit the utile life that may restrict the utile life. Decision:

Since there is no legal. regulative. contractual. competitory. economic. or other factors limit the utile life of reacquired franchise rights. the categorization of indefinite utile life is appropriate.

The utile life of an intangible plus to an entity is the period over which the plus is expected to lend straight or indirectly to the hereafter hard currency flows of that entity. The estimation of the utile life of an intangible plus to an entity shall be based on an analysis of all pertinent factors: 1. The expected usage of the plus by the entity

2. The expected utile life of another plus or a group of assets to which the utile life of the intangible plus may associate ( such as mineral rights to consuming assets ) 3. Any legal. regulative. or contractual commissariats that may restrict the utile life 4. Any legal. regulative. or contractual commissariats that enable reclamation or extension of the asset’s legal or contractual life without significant cost ( provided there is grounds to back up reclamation or extension and reclamation or extension can be accomplished without material alterations of the bing footings and conditions ) 5. The effects of obsolescence. demand. competition. and other economic factors ( such as the stableness of the industry. known technological progresss. legislative action that consequences in an unsure or altering regulative environment. and expected alterations in distribution channels ) 6. The degree of care outgos required to obtain the expected hereafter hard currency flows from the plus ( for illustration. a material degree of needed care in relation to the transporting sum of the plus may propose a really limited utile life ) .