Business Combinations & Segment Reporting - Restaurant Brands - Assignment Example

Advanced Accounting Business Combinations & Segment Reporting Acquisition by Whopper Ltd. Of Weenie Ltd. & Nathan Spare Parts Division To begin with, Whopper Ltd. will acquire the whole of the assets of Weenie Ltd. through the issue of Whopper Ltd. Shares to the total value of these assets. The assets (of Weenie Ltd.) under consideration have the following value:- Land and buildings (net) $60,000 (adjusted for fair value) Plant and machinery (net) $50,000 (adjusted for fair value) Office equipment (net) $4,000 Shares in listed companies $15,000 Inventory $50,000 (adjusted for fair value) Debentures $50,000 Share Capital (Issued at $1, fully paid ) $60,000 Accounts payable $14,000 (Debts are counted as Assets) Total : $303,000 The assets, for the purposes of the acquisition exercise, of Weenie Ltd. will therefore be taken to be $303,000. Therefore, the amount of extra share capital that Whopper Ltd. Will need to issue will be this amount. Whopper shares to the value of $303,000 will theretofore need to be issued. This amounts to a total of 101,000 new Whopper Ltd. shares being issued. The cost of the share issue ($2000) will be accounted for in the next Whopper annual accounts as expenditure. We will now consider the matter of the amount of cash that Whopper Ltd will pay to the proprietors of Weenie Ltd. pay out the current tax liability and provision for leave, to redeem the debentures at a premium of 5%, and to pay its liquidation expenses of $2500. According to the Statement of Accounts provided, these items for Weenie Ltd, have the following value:- Tax Liability $6000 Provision For Leave $10,000 Debentures $52,500 (including the 5% premium) Liquidation $2500 Total : $71,000 Whopper Ltd will therefore need to provide a cash sum of $71,000. It is noted that Whopper Ltd has total cash reserves (cash-in-hand and retained earnings) of $97,000 to cover this sum. At the end of this transaction, Whopper Ltd. will still have $26,000 in cash available. Whether this is enough to cover unforeseen cash liabilities remains to be seen. However, it is noted that Whopper has some $35,000 of accounts receivable, and Weenie Ltd has some $26,000 of same, which Whopper will presumably inherit. It is recommended that, in the event of payment problems, debt factoring be resorted to recover as much of this sum as possible (debt factors typically pay 50% of the notional sum to take over the debts, leaving the enlarged Whopper with $30,500), in order to avoid further bank loans. We will now consider the acquisition of the Nathan spare parts division. The value of the assets to be acquired are as follows. Land and buildings (net) $30,000 (fair value) Plant and machinery (net) $34,500 (fair value) Office equipment (net) $2,500 (fair value) Inventory $12,000 (fair value) Accounts payable $14,000 (fair value, counted as assets for accounting purposes) Provision For Leave $7,000 (fair value) Incidental costs $1,000 It has been presumed that the acquisition of the Nathan spare parts division assets will be done on the basis of fair value, as has been done with Weenie Ltd. Totalling up the values of the assets listed above, Whopper Ltd, will need to find a total sum in cash, shares and assets (the Weenie Ltd. land and buildings) of some $101,000. As instructed, this will be found through $10,000 in cash, $33,000 in Whopper shares at their current value, and the fair value of the Weenie land and buildings, a total of $60,000 at fair value. This gives a total of $103,000 at ‘fair values’. This leaves a discrepancy of some $2,000, in view of the ‘fair values’ of the Nathan assets. This will be best accounted for as a ‘balancing item’ within the Whopper accounts for this transaction, as the sum of $103,000 has been contractually agreed. Liquidation Account of Weenie Ltd. At the end of the transaction with Whopper Ltd., Weenie Ltd. will be left with the following assets and liabilities. Shares in Listed Companies $15,000 Cash $11,000 Goodwill $7,000 Retained Earnings $22.000 Bank Loan (16,000) (Liability) Payment from Whopper $71,000 (cash) Shares in Whopper $303,000 This will leave a total of $413,000 to be distributed between the shareholders of Weenie Ltd, in due proportion to their shareholders. Whopper Journal Entries For Weenie & Nathan (Spare Parts ) Acquisitions For the Weenie acquisition:- Increase in Share Capital : $303,000 Cost of Weenie Share Issue : $2,000 Cash Cost of Weenie Acquisition : $71,000 Cash (In Hand & Retained Earnings) : $26,000 For the Nathan acquisition :- Increase In Share Capital : $33,000 Cash Cost Of Nathan Acquisition : $10,000 Write-Off of Weenie Land & Buildings : $60,000 Cash (In Hand & Retained Earnings) : $16,000 Balancing Item : $2,000 (discrepancy between ‘fair values and contractually agreed cost) - carry forward to next Whopper accounts Note : these transactions have nearly exhausted Whopper’s cash reserves. It is therefore recommended that all possible efforts be made to secure outstanding accounts receivable, and to resort to debt factoring if there is immediate need for ‘ready cash’. Segment Reporting of Larry Ltd. The following material has been compiled with the aid of McGregor, Littleford and Tomlinson [KPMG The Application of IFRS Segment Reporting, September 2010, Steve McGregor (Leader), David Littleford (Deputy Leader), Sanel Tomlinson KPMGs global IFRS Presentation leadership team, KPMG Global Standards Group Available : http://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/ILine-of-Business-publications/Documents/The-Application-of-IFRS-Segment-reporting-(Full-publication-2010).pdf Question 1 : The business operating segments are the New Zealand and the Auatralian branch networks. The three main business units are Banking, Funds Management and Life Insurance. Question 2 : It should be disclosed for accounting purposes that the New Zealand segment of Larry Ltd. Generates some 88% of Larry Ltd’s revenues, and that the Australian branches generate the other 12%, in the three main operating segments. Question 3 : The three main reportable segments are equivalent to the three main business units; Banking, Funds Management and Life Insurance. Al three report their revenues and expenditure to the central Head Office. Question 4 Do allocate the proportions for the relevant business units, it will be necessary to state the relevant gross revenues and costs. These are as follows. Banking Revenue : $850 Million (interest income) Funds Management Revenue : $90 Million (fees and commissions) Life Insurance Revenue : $10 Million (premium income and other fees) EBITDA : $139 Million (banking) £16 Million (finds management) $ 1 Million (life insurance) The fixed costs of Larry Ltd are as follows. Current value of HQ Building : $220 Million Large regional bank branches : $40 Million each (presumed) Depreciation on HQ Building : $4.4 Million Depreciation on major branches : $1.6 Million (combined) Property sale : $34 Million (one-off, not allocated) Banking Segment bad debt : $630 Million Banking Segment associated profit : $2 Million Banking Segment associated investment : $25 Million Total Corporate Goodwill : $200 Million Total Consolidated Profit : $85 Million (net of $36 Million tax) Total Consolidated Liabilities : $11,250 Million Of which Borrowings & deposits : 11,000 Million 2009 Interest Charges : £400 Million Funds Management Liabilities : $200 Million Life Insurance Liabilities : $50 Million FM/LI Asset Transfer : $35 Million (credit to FM, debit from LI) Only 2% of Larry Ltd’s total assets are located in Australia. There were no inter-segment sales during the year. The answers are as follows. a) The depreciation of the HQ building during the year ended 30th June 2009 was £4.4 Million. The notional charge against corporate profits for HQ management services has not been specified in the Accounts. b) The two regional bank branches have been allotted depreciation fir the year ended 30th June 2009 of $800,000 each in the absence of more detailed figures having been reported. c) The gain on the sale of the investment property has been defined as $34 Million, to be put toward the corporate EBITDA for the year. d) The total investment on the associated property was $25 Million and contributed $2 Million to corporate EBITDA. e) The corporate goodwill for the year ending 30th June 2009 was identified as $200 Million, The depreciation of which was identified as $20 Million f) The Interest Income was generated by the Banking segment and was identified as $850 Million, and the cost of this interest (presumably interest lpaid to depositors) was $(850-711) Million = $139 Million. Question 5 The segments that require separate disclosure, including amounts to be disclosed or eliminated on consolidation, are as follows. Value of HQ building, depreciation and running costs of same, and the head office management services ‘cost centre’, which is set off against the corporate EBITDA. Value of regional bank branches, deprecation and running costs of same, and regional bank branch management services ‘cost centre’ to set against corporate EBITDA. Value of Australian branch network, deprecation and running costs of same, and Australian bank branch management services ‘cost centre’ to be set against corporate EBITDA. This will be approximately12% of the total of such costs of the whole bank. It will also have to be reported to the Australian authorities, so that the correct amount of tax may be paid in that country. Gross revenues of the Banking sector, including costs of interest paid to depositors, plus the Banking management services ‘cost centre’ that cannot be attributed to the Larry Ltd. HQ. Gross revenues of the Funds Management segment, including direct costs (interest laid to investors) plus the plus the Funds Management management services ‘cost centre’ that cannot be attributed to the Larry Ltd. HQ. Gross revenues of the Life Insurance segment, including direct costs (interest laid to those insured and loss of premiums) plus the plus the Life Insurance management services ‘cost centre’ that cannot be attributed to the Larry Ltd. HQ. Question 6 The figure that will be used for the calculation of the consolidated profit after tgax will be the EBITDA figure. For the whole of Larry Ltd. This is as follows. Banking segment : $139 Million Funds Management : £16 Million Life Insurance : $ 1 Million A total of $156 Million Set against this are the following:- Depreciation on HQ Building : $4.4 Million Depreciation on major branches : $1.6 Million (combined) Goodwill : $20 Million Tax : $36 Million Total costs out of EBITDA : $62 Million Consolidated Profit : $(156-62) Million = £94 Million Question 7 : Segment Disclosures The segment disclosures for Larry Ltd have been drawn up using a combination of products and services, and geographical areas, as described in the KPMG document. And are also in accordance with the way the management views the business. These segment disclosures are as follows:- New Zealand Banking New Zealand Finds Management New Zealand Life Insurance Australian Banking Australian Funds Management Australian Life Insurance The fact that the Australian operation only contributes some 12% of Larry Ltd’s revenue and profits is of strictly secondary importance. Demonstration of Analytical and Interpretational Skills a) i) Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker as defined under New Zealand law. This officer is responsible for allocating resources and assessing performance of the operating segments which have been identified as the Restaurant Brands’ Senior Leadership Team. This Senior Leadership Team reviews the Restaurant Brand’s internal reporting in order to assess performance and allocate resources. Two excellent examples were the KFC Double Down promotion and the KFC grilled chicken dish. ii) Segment-based reporting gives investors a quick and clear view of how a given segment of their investment is performing, without wading through vast amounts of corporate ‘jargon’ such as the UK is plagued with (!!) Two good examples are the Restaurant Brands New Zealand KFC and Piozza Hut franchises, whose results have been presented in tabular form (asmper the 20123 Report), thus:- iii) One obvious disadvantage is that any of the firm competitors who gets hold of this Report (which is currently freely available on the Web) will be able to see at a glance what Restaurant Brands is doing right and what they are doing wrong, and adjust their competitive stance accordingly. Three examples of such segments (taken from the 2012 Report) are the ‘Tastes’ segment, the ‘Customer’ segment and the ’Brands’ segment iv) Such compliance is achieved, according to the KPMG Report, through allowing the restating comparative information form the previous year, then explaining how the accounting basis has changed. This presumably includes current financial information when and where appropriate. b),i) The classes of related parties identified in NZ IAS 24 come under ’related parties disclosures’ as follows, using examples from the Restaurant Brands 2012 report. Parent and ultimate controlling party Identity of related parties with whom material transactions have occurred Subsidiaries Other transactions with entities with key management or entities related to them, such as stock and materials purchases. ii) The outstanding disclosure made by the company’s key decision makers are that commercial environment in the period leading up to the 2012 Reprt has been a very challenging one, and two examples quoted are trhe KFC and Pizza Hut franchises outlines above. iii) It is hard to quantify a direct cost of such disclosures, although they may be an indirect negative impact on the medium and long-term competitive position of Restaurant Brands if the competition is ‘really on the ball’. The main benefit will be ijn reassuring investors that the Company’s management is doing all that it can in the current challenging commercial environment, and therefore any changes would be of no benefit, and may make things worse. c) i) The finances raised by the Group (which incorporates the Company) are best illustrated by citing the following table of sources of capital, taken from the June 2012 Report. There appear to be no Ordinary or Preference Shares, as such, issued by the Restaurant Brands Group, the Group’s capital being comprised of Bank loan and debtors being accounted for as assets on the usual way. There are a small amount financial derivatives held, but this is a negligible amount of the total capital. ii) The Group’s financial structure comes across as rather disturbing. For example, there is an item listed under ‘Company’ finance that is labelled ‘Amounts payable to subsidiary companies’. This looks rather like an example of the financial engineering that has lead to the current international crisis, and could, under extreme circumstances, ‘break’ the Group is such payments had to be made. Also, much of the Restaurant Brands working capital; is listed in the form of stock (presumably food and other consumables) which one would expect would fetch a small percentage of it’s stated value of the Group/Company had to be suddenly liquidated. To conclude, Restaurant Brands is not a company that members of the general public, of whatever nationality, should invest in, such investments being left to those who can absorb losses in the hundreds of thousands of NZ$ firm their own resources. References KPMG The Application of IFRS Segment Reporting September 2010 Steve McGregor (Leader) David Littleford (Deputy Leader) Sanel Tomlinson KPMGs global IFRS Presentation leadership team KPMG Global Standards Group Available : http://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/ILine-of-Business-publications/Documents/The-Application-of-IFRS-Segment-reporting-(Full-publication-2010).pdf Restaurant Brands New Zealand Limited- Financial Statement for the year ended 28.02.2011/2012. Available : http://www.restaurantbrands.co.nz/reports/annual2012.pdf Read More