Caribou Coffee and Fazer Group: Comparison and Contrast - Essay Example

Caribou Coffee and Fazer Group: Comparison and Contrast Caribou Coffee and Fazer Group: Comparison and Contrast Fazer Group and Caribou Coffee are two companies operating in the food service industry. As per appropriate disclosures made in the financial statements of the two companies under review, the following information was gathered: Accounting and Auditing Standards used: Relevant reporting standards used by Caribou Coffee are US Generally Accepted Accounting Principles (Gibson, 2010). Operating within the United States, companies under the Security Exchange Commission are required to report their financial information along with appropriate disclosures as per the US GAAP. As adequately disclosed in the annual report, Caribou Coffee operates under Public Company Accounting Oversight Board (United States) auditing standards. Fazer Group is based in Finland with foreign subsidiaries throughout Europe and Russia. According to the disclosure in its Annual Review, standards appropriate to ‘current legislation’ and the company’s Articles of Association are used. As countries listed with the EU securities market use the International Financial Reporting Standards for reporting purposes, it is concluded that the parent company prepares its consolidated financial statements according to the IFRS (Weygandt, Kimmel, & Kieso, 2010). The Auditing Board of the Central Chamber of Commerce undertakes responsibility for local auditing standards within Finland, so it can also be concluded that relevant audit standards used by Fazer Group are as per ABC (DeloitteToucheTohmatsuLimited, 2013). Inconsistencies between the Two Financial Statements: The differences arising due to regulatory variances between the two accounting standards boards are prevalent in the annual statements of the two companies. Comparability of the income statement may be difficult as Fazer group’s income statement does not incorporate Cost of Sales or Cost of Goods Sold as an individual line item whereas Caribou’s income statement does. Fazer’s statements have specified increase or decrease in inventory stock individually whereas Caribou’s have included inventory movements within COS. This may give rise to comparability issues within the operational cost heads of the two companies (KPMG, 2012). Caribou’s statement of cash flows does not incorporate the impact of the finance cost, dividends paid and tax paid after the ‘changes in operating assets and liabilities’ segment of the cash flows from operating activities; instead the information is provided as supplementary disclosure at the end of the statement of cash flows. As per IFRS regulations, this adjustment is made in Fazer’s statement of cash flows. This, eventually, creates a discrepancy between the final figures for operating cash flows for the two companies. Conclusive statements about the companies’ performances based on the statement of cash flows cannot be drawn as a result. Purchase of the subsidiary is incorporated within the investing activities of Fazer Group; however, this adjustment is non-existent in the consolidated statement of cash flows of Caribou. IFRS directs the investment in subsidiary removed from the consolidated statement of financial position for business combinations (Ernst&YoungLLP, 2012). Financial statements under US GAAP categorize deferred tax asset as ‘current’ asset as a viable form of classification, however as necessitated by the IFRS all deferred tax components have to be classified as non-current within the balance sheet. Distribution of non-controlling interest is included in financing activities of Caribou with no such adjustment carried out in Fazer’s statements. This reflects that US GAAP accounts for the minority interest in the subsidiary as a form of financing activity for the parent company, a concept not relevant to IFRS. Comparability of the Financial Statements: Comparability between financial information of companies regulated by different accountancy bodies inevitably gives rise to certain inconsistencies (DeloitteToucheTohmatsuLimited, 2011). Initiating from the gross and net profitability, even though the treatment for cost of goods sold appears to be different for both companies, gross profit in both income statements incorporates the effect of inventory movement during the year. So we can conclude that net and profitability can be compared between Fazer group and Caribou. Keeping in mind that both companies own subsidiaries, hence prepare consolidated financial information, the different methodologies used to classify their investments in subsidiaries (and treatment for minority interest) gives rise to further discrepancies within the financial data. Cash flow movements during the year, especially those of operating activities cannot be compared between Fazer group and Caribou. As mentioned earlier, interest, tax and dividend payments made by the company are adjusted within the operating activities for companies regulated by the IASB (Wild, 2006). This, however, is not the case with the US GAAP. Subsidiary purchase being classified as an investing activity by Fazer Group also makes it impractical to compare cash flows from investing activities of the two companies. Therefore, profitability comparisons between the two companies can be carried out to formulate a general performance analysis. However inconsistencies within the accountancy standards leave it highly improbable to conduct an accurate detailed contrast of the two companies. Analysis of Financial Information:   Caribou Coffee Company($000) Fazer Group (€000) Income Statement Items  2012 2011 2010 2012 2011 2010 Sales Revenue 326,504 283,997 262,539 1676400 1575500 1513600 Operating Profit 15,193 10,107 5,541 68600 54200 58500 Profit Before tax 14,926 9,721 5,306 67000 49800 58400 Net Profit for the year 35,223 9,400 5,138 34400 21300 31700 (FazerGroup, 2012) (CaribouCoffeeCompanyInc, 2012) Profitability Analysis: Operating Profit Margin= [Operating Profit/Sales] x100 Net Profit Margin = [Net Profit/Sales] x 100 Return on Equity = [Net Profit/Equity] x 100 Asset Turnover = Sales/Total Assets Using a methodology that can be applied to the financial information of both companies the need for currency translation is eliminated for profitability purposes (Wahlen, Stickney, & Baginski, 2010), as all calculations are based on financial ratios. A general analysis reflects that Caribou Coffee Company’s revenues have grown by 14.97% between the years 2011 and 2012, whereas those of Fazer Group have grown by 6.4% in the same accounting year. For the same accounting year ended 2012 Caribou has experienced a staggering growth in net income which can be associated to an unusual benefit from income tax (worth $20,676,000). Excluding this unusual item in the income statement, Caribou’s net income growth between 2011 and 2012 is 53.5%. Fazer Group, for the same period, has 61.5% growth in net income. Using Profitability ratios Caribou Coffee Company is evidenced to show improved operating profit margins over the 3 year period, whereas Fazer has reflected a comparatively slower growth in operating profits. Return on Equity employed is also a method for profitability analysis (Kimmel, Weygandt, & Kieso, 2009). Fazer’s return on equity has grown gradually after a decline in 2011; with contribution from the income tax benefit gained in 2012 Caribou Coffee’s return on equity has reflected significant growth. Even though a significant percentage of the increased income for Caribou can be attributed to the unusual line item in its income statement, an improved operating profit margin also suggests increased operating performance of the company (Warren, Reeve, & Duchac, 2012). An overview of the financial performance has reflected that both companies have experienced profitability growth during the comparative periods. However, Caribou Coffee shows a comparatively improved performance than Fazer Group in this regard. Reference List CaribouCoffeeCompanyInc. (2012). Annual Report. Minnesota: Carribou Coffee Company Inc. DeloitteToucheTohmatsuLimited. (2011, June). Beyond the Standards. iGAAP Newsletter, pp. 4-5. DeloitteToucheTohmatsuLimited. (2013). Finland-IAS Plus. Retrieved from Deloitte IAS Plus: http://www.iasplus.com/en/jurisdictions/europe/finland Ernst&YoungLLP. (2012, November). UG GAAP versus IFRS: the basics. Retrieved from Ernst & Young: http://www.ey.com/Publication/vwLUAssets/IFRSBasics_BB2435_November2012/$FILE/IFRSBasics_BB2435_November2012.pdf FazerGroup. (2012). Fazer Annual Review. Fazer Group. Gibson, C. H. (2010). Financial Reporting and Analysis: Using Financial Accounting Information. Mason, OH: Cengage Learning. Kimmel, P. D., Weygandt, J. J., & Kieso, D. E. (2009). Financial accounting: Tools for business decision making. Hoboken, NJ: John Wiley & Sons. KPMG. (2012). IFRS compared to US GAAP: An overview. Delaware: KPMG LLP. Wahlen, J. M., Stickney, C. P., & Baginski, S. P. (2010). Financial Reporting, Financial Statement Analysis, and Valuation: A Strategic Perspective. Mason, OH: Cengage Learning. Warren, C. S., Reeve, J. M., & Duchac, J. E. (2012). Financial accounting. Mason, OH: South-Western Cengage Learning. Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2010). Financial Accounting, Study Guide. Hoboken, NJ: John Wiley & Sons. Retrieved from McGraw Hill: http://highered.mcgraw-hill.com/sites/dl/free/0073526681/355565/wiL03970_appE.pdf Wild, J. J. (2006). Financial Statement Analysis. New York: McGraw-Hill. Read More