Summary of Reacquired Franchise Rights Essay

1202 Words Jan 18th, 2013 5 Pages
Summary of Reacquired Franchise Rights It has come to our attention that much of Roman Holiday’s recent revenue growth came from acquisition of franchise right and existing restaurants rather than real growth in the franchise. Management is aware of these issues and may be feeling some pressure to meet growth targets and earnings forecasts. In the following working papers, we address this potential issue by reviewing the various accounting treatments for the reacquired franchise rights. We also examine the reacquired franchise rights from the Arizona acquisition and assess the reasonableness of management’s assumptions in its impairment analysis.
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Purpose: The purpose of this testing procedure is to verify the mathematical accuracy
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The reasons for these acquisitions are varied and include taking over poorly performing restaurants to protect the company’s brand name and to preserver the value of the local market. Reacquisitions also take place for strategic cash flow management purposes whereby investing current free cash flows in the reacquisition yields the expectation of replacing franchise royalties with the larger profits from the restaurants themselves. Company almost always pays some premium related to the contractual element of the franchise right that is capitalized as an intangible asset. However, it must be noted that the classification and nature of the intangible asset varies substantially.
Roman Holiday defined reacquired franchise rights as “the excess of the net amount assigned to identifiable assets and liabilities recorded upon the acquisition of franchise markets.” It was classified as an intangible asset with an indefinite life. The reacquired franchise rights takes over 29% of Roman Holiday’s total asset and the complicities in the classifications introduce significant risks of material misstatement in the company’s financial statements. The classification should be critically assessed in order to ensure the fair presentation of the company’s financial statement.
Based on SFAS No.142 states goodwill and intangible assets that have indefinite useful life will not be