Auditing risk and accounting uncertainty in the Roman Holiday case

¶ … Roman Holiday. For part one, do not only explain the general auditing concept and rules but also use the methodology to analyze the CASE FACT.

For part 2, please use the data provided by the case to calculate acceptable Accounting risk. And also follow the 3 requirements written in the assignment instructions, in addition, make a conclusion based on your result.

Accounting risk -AccR is accounting risk reflecting accounting uncertainties with respect to an accounting number (this is the risk associated with the lottery ticket illustration). AccR refers to uncertainties associated with the need to use estimates in accrual accounting. These uncertainties arise from the need to make predictions of the future in developing accounting estimates

Probability of Material Mistatement=PMM = AccR + ((1 -- AccR) X AudR)

Please notice that this is a case study report, so it is better to use subjective view in the essay, it is not proper to write such as "You are required to perform ratio analysis on the Income Statement and the Balance Sheet...." In the essay.

Since I have to due this paper in 48 hours, so please finish it ASAP! Thanks very much

Message for - Order Number

Date:03-04-2011-10:03 PM

HI, I have viewed the essay, I think you should relate more to the case fact -- Roman Holiday. For part one, do not only expain the general auditing concept and rules but also use the methodology to analyze the CASE FACT.

For part 2, please use the data provided by the case to calculate acceptable Accounting risk. And also follow the 3 requirements written in the assignment instructions, in addition, make a conclusion based on your result.

Accounting risk -AccR is accounting risk reflecting accounting uncertainties with respect to an accounting number (this is the risk associated with the lottery ticket illustration). AccR refers to uncertainties associated with the need to use estimates in accrual accounting. These uncertainties arise from the need to make predictions of the future in developing accounting estimates

Probability of Material Mistatement=PMM = AccR + ((1 -- AccR) X AudR)

Please notice that this is a case study report, so it is better to use subjective view in the essay, it is not proper to write such as "You are required to perform ratio analysis on the Income Statement and the Balance Sheet...." In the essay.

And since I have to due this paper in 48 hours, so please finish it ASAP!

Please tell me if what you are looking for appears something like this:

How to Brief a Case Using the "IRAC" Method

When briefing a case, your goal is to reduce the information from the case into a format that will provide you with a helpful reference in class and for review. Most importantly, by "briefing" a case, you will grasp the problem the court faced (the issue); the relevant law the court used to solve it (the rule); how the court applied the rule to the facts (the application or "analysis"); and the outcome (the conclusion). You will then be ready to not only discuss the case, but to compare and contrast it to other cases involving a similar issue.

Before attempting to "brief" a case, read the case at least once.

Follow the "IRAC" method in briefing cases:

Facts*

Write a brief summary of the facts as the court found them to be. Eliminate facts that are not relevant to the court's analysis. For example, a business's street address is probably not relevant to the court's decision of the issue of whether the business that sold a defective product is liable for the resulting injuries to the plaintiff. However, suppose a customer who was assaulted as she left its store is suing the business. The customer claims that her injuries were the reasonably foreseeable result of the business's failure to provide security patrols. If the business is located in an upscale neighborhood, then perhaps it could argue that its failure to provide security patrols is reasonable. If the business is located in a crime-ridden area, then perhaps the customer is right. Instead of including the street address in the case brief, you may want to simply describe the type of neighborhood in which it is located. (Note: the time of day would be another relevant factor in this case, among others).

Procedural History*

What court authored the opinion: The United States Supreme Court? The California Court of Appeal? The Ninth Circuit Court of Appeals? (Hint: Check under the title of the case: The Court and year of the decision will be given). If a trial court issued the decision, is it based on a trial, or motion for summary judgment, etc. If an appellate court issued the decision, how did the lower courts decide the case?

Issue

What is the question presented to the court? Usually, only one issue will be discussed, but sometimes there will be more. What are the parties fighting about, and what are they asking the court to decide? For example, in the case of the assaulted customer, the issue for a trial court to decide might be whether the business had a duty to the customer to provide security patrols. The answer to the question will help to ultimately determine whether the business is liable for negligently failing to provide security patrols: whether the defendant owed plaintiff a duty of care, and what that duty of care is, are key issues in negligence claims.

Rule(s):

Determine what the relevant rules of law are that the court uses to make its decision.

These rules will be identified and discussed by the court. For example, in the case of the assaulted customer, the relevant rule of law is that a property owner's duty to prevent harm to invitees is determined by balancing the foreseeability of the harm against the burden of preventive measures. There may be more than one relevant rule of law to a case: for example, in a negligence case in which the defendant argues that the plaintiff assumed the risk of harm, the relevant rules of law could be the elements of negligence, and the definition of "assumption of risk" as a defense. Don't just simply list the cause of action, such as "negligence" as a rule of law: What rule must the court apply to the facts to determine the outcome?

Rule(s):

Determine what the relevant rules of law are that the court uses to make its decision. These rules will be identified and discussed by the court. For example, in the case of the assaulted customer, the relevant rule of law is that a property owner's duty to prevent harm to invitees is determined by balancing the foreseeability of the harm against the burden of preventive measures. There may be more than one relevant rule of law to a case: for example, in a negligence case in which the defendant argues that the plaintiff assumed the risk of harm, the relevant rules of law could be the elements of negligence, and the definition of "assumption of risk" as a defense. Don't just simply list the cause of action, such as "negligence" as a rule of law: What rule must the court apply to the facts to determine the outcome?

Application/Analysis:

This may be the most important portion of the brief. The court will have examined the facts in light of the rule, and probably considered all "sides" and arguments presented to it. How courts apply the rule to the facts and analyze the case must be understood in order to properly predict outcomes in future cases involving the same issue. What does the court consider to be a relevant fact given the rule of law? How does the court interpret the rule: for example, does the court consider monetary costs of providing security patrols in weighing the burden of preventive measures? Does the court imply that if a business is in a dangerous area, then it should be willing to bear a higher cost for security? Resist the temptation to merely repeat what the court said in analyzing the facts: what does it mean to you? Summarize the court's rationale in your own words. If you encounter a word that you do not know, use a dictionary to find its meaning.

Conclusion

What was the final outcome of the case? In one or two sentences, state the court's ultimate finding. For example, the business did not owe the assaulted customer a duty to provide security patrols.

Note: "Case briefing" is a skill that you will develop throughout the semester. Practice will help you develop this skill. Periodically, case briefs will be collected for purposes of feedback. At any time, you may submit your case brief(s) for feedback.

Roman Holiday Pizza:

Due to the staple set by the IPO as well as, if not increasingly more than, investors focusing on the promise of pure speculation, the Roman Holiday financed its growth. As is evident, the IPO planted the seed, and the investors nourished the growth.

That is the beauty of the successful and rising platform established through successful investments; it all becomes quite circular. Then, by reinvesting and refinancing earnings, everything becomes stronger. Just as easily, however, this corporation could have been buried.

1. What is a franchising arrangement? And how is this reflective of business expansion? Moreover, how does this support business growth? From HighBeam Business, these key-terms set the stage from here on out:

MLA: Pondent, Corr S. "About Reacquired Franchise Rights" (29 December 2010). Highbeam Business: Money. eHow. Demand Media, Inc. Web. 18 March 2011.

About Reacquired Franchise Rights

A franchising arrangement is a way to expand a company's business without investing a lot of additional money. The franchisee gets the use of an existing business model, or franchise rights, as well as business support, and pays the franchisor a franchise fee in return.

Reacquired Rights

The franchisor could decide to buyback franchise rights from the franchisee for various reasons. For instance, the company may want to maintain consistency with its suppliers and wholesalers.

Accounting Treatment

Typically, the accounting treatment for reacquired franchise rights is to amortize, or write down, the value of the acquisition over a period of time. This is the approach that many restaurant industry franchisors have followed.

Aggressive Treatment

Some companies take a more aggressive approach in accounting for their reacquired franchise rights. Not writing down the value of these rights over time boosts the company's profits since the write-downs would reduce earnings.

*Corr S. Pondent has provided these clear and concise definitions, so I will post them upfront in order to draw a more linear flow from here on out.

2. Auditee client impairment analysis:

Citation: Katz, Jonathan G. Secretary Commissioner (16 February 2000). SEC Concept Release: International Accounting Standards. SECURITIES and EXCHANGE COMMISSION. 17 CFR PARTS 230 and 240 [RELEASE NOS. 33-7801, 34-42430; INTERNATIONAL SERIES NO. 1215] FILE NO. S7-04-00 [RIN: 3235-AH65] INTERNATIONAL ACCOUNTING STANDARDS

According to the Securities and Exchange Commission (SEC):

B. High Quality Auditing Standards

The audit is an important element of the financial reporting structure because it subjects information in the financial statements to independent and objective scrutiny, increasing the reliability of those financial statements. Trustworthy and effective audits are essential to the efficient allocation of resources in a capital market environment, where investors are dependent on reliable information.

Quality audits begin with high quality auditing standards. Recent events in the United States have highlighted the importance of high quality auditing standards and, at the same time, have raised questions about the effectiveness of today's audits and the audit process. We are concerned about whether the training, expertise and resources employed in today's audits are adequate.

Audit requirements may not be sufficiently developed in some countries to provide the level of enhanced reliability that investors in U.S. capital markets expect. Nonetheless, audit firms should have a responsibility to adhere to the highest quality auditing practices -- on a world-wide basis -- to ensure that they are performing effective audits of global companies participating in the international capital markets. To that end, we believe all member or affiliated firms performing audit work on a global audit client should follow the same body of high quality auditing practices even if adherence to these higher practices is not required by local laws. Others have expressed similar concerns.

From an academically published article titled "Auditing Estimates: A Task Analysis and Propositions for Improving Auditor Performance" from Emily E. Griffith, Jacqueline S. Hammersley, and Kathryn Kudous, evident become the Auditee client impairment analysis:

Griffith, Emily E. (University of Georgia). Hammersley, Jacqueline S. (University of Georgia). Kadous, Kathryn (Emory University). "Auditing Estimates: A Task Analysis and Propositions for Improving Auditor Performance." (October 2010). Web. 18 March 2011.

Auditing Estimates: A Task Analysis and Propositions for Improving Auditor Performance

Market participants rely on accounting estimates, including fair values and impairments, to get a clear picture of a company's financial condition; however, estimates are difficult to audit. We analyze how auditors assess the reasonableness of accounting estimates with the goals of identifying what difficulties auditors experience in performing the task and how their performance can be improved. We interview 15 very experienced auditors from the set of firms that perform over 100 audits of public companies annually to assess how auditors perform the task and what difficulties they experience. We compare interview results with audit standards to evaluate how well auditors match required steps in the process. We perform a content analysis of PCAOB inspection reports to further shed light on difficulties auditors experience in auditing estimates. We find that both auditors and regulators report auditor difficulties with over-reliance on management assertions. That is, auditors sometimes fail to understand management's process for generating the estimate, fail to adequately test the underlying data and assumptions, and fail to notice inconsistencies of the estimate with other internal data or external conditions. We draw on the mindset literature in judgment and decision making to suggest ways that auditors can improve their performance in this important task.

Total Current Liabilities

Quick Ratio: Quick ratio focuses on immediate liquidity (i.e., cash, accounts receivable, etc.) but specifically ignores inventory. Also called the acid test ratio, it indicates the extent to which you could pay current liabilities without relying on the sale of inventory. Quick assets are highly liquid and are immediately convertible to cash. A general rule of thumb states that the ratio should be 1 to 1 (or 1:1 or 1/1).

The formula is:

Cash + Accounts Receivable

( + any other quick assets )

Current Liabilities

2. Safety

Safety indicates a company's vulnerability to risk, e.g., the degree of protection provided for the business' debt. Three ratios help you evaluate safety.

Debt to Equity: Debt to equity is also called debt to net worth. It quantifies the relationship between the capital invested by owners and investors and the funds provided by creditors. The higher the ratio, the greater the risk to a current or future creditor. A lower ratio means your client's company is more financially stable and is probably in a better position to borrow now and in the future. However, an extremely low ratio may indicate that your client is too conservative and is not letting the business realize its potential.

The formula is:

Total Liabilities (or Debt)

Net Worth (or Total Equity)

EBIT/Interest: This assesses the company's ability to meet interest payments. It also evaluates the capacity to take on more debt. The higher the ratio, the greater the company's ability to make its interest payments or perhaps take on more debt.

The formula is:

Earnings Before Interest & Taxes

Interest Charges

Cash Flow to Current Maturity of Long-Term Debt: Indicates how well traditional cash flow (net profit plus depreciation) covers the company's debt principal payments due in the next 12 months. It also indicates if the company's cash flow can support additional debt.

The formula is:

Net Profit + Non-Cash Expenses*

Current Portion of Long-term Debt

*Such as depreciation, amortization and depletion.

3. Profitability

Profitability ratios measure the company's ability to generate a return on its resources. Use the following four ratios to help your client answer the question, "Is my company as profitable as it should be?" An increase in the ratios is viewed as a positive trend.

Gross Profit Margin: Gross profit margin indicates how well the company can generate a return at the gross profit level. It addresses three areas -- inventory control, pricing and production efficiency.

The formula is:

Gross Profit

Total Sales

Net Profit Margin: Net profit margin shows how much net profit is derived from every dollar of total sales. It indicates how well the business has managed its operating expenses. It also can indicate whether the business is generating enough sales volume to cover minimum fixed costs and still leave an acceptable profit.

The formula is:

Net Profit

Total Sales

Return on Assets: This evaluates how effectively the company employs its assets to generate a return. It measures efficiency.

The formula is:

Net Profit Before Taxes

Total Assets

Return on Equity: This is also called return on investment (ROI). It determines the rate of return on the invested capital. It is used to compare investment in the company against other investment opportunities, such as stocks, real estate, savings, etc. There should be a direct relationship between ROI and risk (i.e., the greater the risk, the higher the return).

The formula is:

Net Profit Before Taxes

Net Worth

4. Efficiency

Efficiency evaluates how well the company manages its assets. Besides determining the value of the company's assets, you and your client should also analyze how effectively the company employs its assets. You can use the following ratios:

Accounts Receivable Turnover: This ratio shows the number of times accounts receivable are paid and reestablished during the accounting period. The higher the turnover, the faster the business is collecting its receivables and the more cash the client generally has on hand.

The formula is:

Total Net Sales

Accounts Receivable

Accounts Receivable Collection Period: This reveals how many days it takes to collect all accounts receivable. As with accounts receivable turnover (above), fewer days means the company is collecting more quickly on its accounts.

The formula is:

365 Days

Accounts Receivable Turnover

Accounts Payable Turnover: This ratio shows how many times in one accounting period the company turns over (repays) its accounts payable to creditors. A lower number indicates either that the business has decided to hold on to its money longer or that it is having greater difficulty paying creditors.

The formula is:

Cost of Goods Sold

Accounts Payable

Days Payable: This ratio shows how many days it takes to pay accounts payable. This ratio is similar to accounts payable turnover (above.) the business may be losing valuable creditor discounts by not paying promptly.

The formula is:

365 days

Accounts Payable Turnover

Inventory Turnover: This ratio shows how many times in one accounting period the company turns over (sells) its inventory and is valuable for spotting under-stocking, overstocking, obsolescence and the need for merchandising improvement. Faster turnovers are generally viewed as a positive trend; they increase cash flow and reduce warehousing and other related costs.

The formula is:

Cost of Goods Sold

Inventory

Days Inventory: This ratio identifies the average length of time in days it takes the inventory to turn over. As with inventory turnover (above), fewer days mean that inventory is being sold more quickly.

The formula is:

365 Days

Inventory Turnover

Sales to Net Worth: This volume ratio indicates how many sales dollars are generated with each dollar of investment (net worth).

The formula is:

Total Sales

Net Worth

Sales to Total Assets: This indicates how efficiently the company generates sales on each dollar of assets. A volume indicator, this ratio measures the ability of the company's assets to generate sales.

The formula is:

Total Sales / Total Assets; Debt Coverage Ratio

To further indicate the company's ability to satisfy its debt obligations and its capacity to take on additional debt without impairing its survival.

This is the general formula:

Net Profit + Any Non-Cash Expenses / Principal on Debt

Source Citation:

Seid, Michael. "Franchise Relations." Smart Solutions MSA Worldwide, LLC 94 Mohegan Drive, West Hartford, Connecticut, U.S.A. 06117. Web. 18 March 2010.

Nathan, Greg. "THE SIX STAGES of FRANCHISE RELATIONSHIPS." Franchise Chat. Web. 18 March 2010.

Alongside these steps entailed by Greg Nathan, those listed within the far more concise "Franchise Relations" by Michael Seid, which follows, summarizes this point implicitly:

The Glee Stage

"I am very happy with the relationship I have with my franchisor. They obviously care about my success and have delivered all they said. I am excited about my new business and full of hope for the future."

Initially franchisees are filled with glee. Along with their decision to buy a franchise comes the anticipation of whether things will work out and of course the hope of making lots of money.

During the opening stages of the business the franchisor will also be busy providing encouragement and support to their fresh and motivated franchisee. Like a wedding ceremony, the speeches at opening ceremonies of franchised outlets usually contain profound commitments such as;

"We will always be here for you";

"You are the reason for our existence"; or "If you have any problems at all, just call and we will be there."

Positive emotions run high at this stage. There is a great sense of achievement for everyone as the numerous hurdles in establishing the business have now been cleared.

The Glee stage covers the lead up period to buying into the franchise and will usually stay with a franchisee for between 3 and 12 months, depending on their past business experience.

The Fee Stage

"Although I'm making money, these royalty payments are really taking the cream off the top. What am I getting for my money?"

The second Fee stage kicks in as the franchisee gains more of a handle on the business's finances. It comes from a growing appreciation that profit is the result of sales minus expenses. At this point they may become particularly sensitive to the royalty and advertising fees, which they see as annoying expenses that into their profits.

Questions such as, "What am I getting for my money?" will surface in their mind, especially when they review their weekly royalty fees.

At this stage the franchisee's level of satisfaction starts to drop.

There are basically two paths from the Fee stage - either back to Glee, (this can happen when the franchisor provides significant assistance, for example with a rent reduction), or into the Me stage.

The Me Stage

"Yes I am successful. But my success is a result of my hard work. I could probably be just as successful without my franchisor."

As the franchisee moves into the Me stage he or she will typically be thinking that their success is due purely to their own hard work and effort. This natural tendency to take the credit for the good things, is known in psychology as the 'Attribution Effect' or the 'Self-Serving Bias'. Attribution theory explains the thinking process we go through in searching for the best explanation of an event and also suggests that we are not all as rational as we might like to believe.

When we perform well or achieve something we tend to attribute this to our inherent skills and personality. We take the credit. But when we make mistakes or don't perform up to expectations we tend to blame someone else or outside circumstances.

The human ego has always been a master at playing with our minds - giving us reasons why we are right and others are wrong, why we are good and others are bad, why we are smart and others are stupid, and so on. For some people it is a way of protecting their self-esteem.

Not surprising, we find the Self-Serving Bias alive and well in the franchise relationship. It tends to be at its strongest when the franchisee moves through the Me stage where they will tend to attribute their success to their own work and initiative. If things are not going so well however, the franchisor is inevitably held to blame. Either way the franchisor usually starts to receive some criticism.

The Free Stage

"I really don't like all these restrictions my franchisor is putting on the way I run my business. I feel frustrated and annoyed at their constant interference. I want to be able to do my own thing and express my own ideas."

While the franchise relationship tends to begin with the franchisee relatively dependent on the franchisor this does not last. As a franchisee's business confidence grows, their drive towards independence will increasingly assert itself. A franchisee at this stage might feel resentful having to follow the franchisor's standard operating procedures all the time.

The Free stage is characterized by a need to break free of the restrictions and limitations of the franchise and a testing of the system's boundaries. A franchisee might also test out how tight the franchise agreement is and try to break free of their contractual obligations.

The franchisor might also decide to break free of the franchisee, either through a forced sale or termination of the agreement. Obviously chances of conflict are greatest at this point.

A franchisee who is stuck in this stage can become trouble to him or herself and a negative influence on others. They may also be a ripe target to be exploited by someone wanting to provoke trouble in the franchise network. As we saw in Chapter 6, unscrupulous lawyers or consultants have been known to use franchisees who are unhappy about specific issues as their ticket to make some money.

At this stage the franchisee will either get bogged down in resentment and continue to bicker with their franchisor, revert to the Me stage with intermittent but harmless grumbling, or move to the next stage - the quantum leap - the See stage.

The See Stage

"I guess I can see the importance of following the franchise system. And I do acknowledge the value of my franchisor's support services. I can see that if we all did our own thing standards would drop and we would lose the very things that give us our competitive edge."

Conflict in relationships seldom goes away by ignoring it. For the franchisee to move to the See stage there needs to be some frank and open discussions, where franchisee and franchisor listen carefully to each other's point-of-view. There may be some blood letting as previous disputes or disagreements are reopened. Mistakes and misunderstanding will no doubt have occurred on both sides of the relationship. There needs to be an acceptance and letting go of the past by both parties.

The franchisor might need to be more open in involving the franchisee in future planning or appreciating their specific needs. If the franchise system has been managed fairly and effectively the franchisee will generally come around to seeing that without consistency and adherence to the systems, the strength of the entire group would be lost. It is this shift in perception that characterizes the See stage.

The We Stage

"We need to work together to make the most of our business relationship. I need some specific assistance in certain areas to develop my business but I also have some ideas that I want my franchisor to consider."

From the See stage there is a natural progression to the We stage - a move from independent to interdependent thinking. At this point the franchisee is prepared to put his or her ego aside and recognises that success and satisfaction generally come more easily from working with, rather than against, their franchisor.

To reach the We stage a franchisee must be mature, objective and commercially minded. Most importantly, they must be profitable. As long as a franchisee is not making acceptable profits and feels their franchisor is not responding to their needs they will shake the system for change.

A franchisor that wants their franchisees to move into the We stage must deliver on their obligations and be fair and consistent in their dealings.

Franchisees who have negotiated their way through the franchise relationship minefield to the We stage are a franchise network's greatest asset. They will often be quiet achievers who keep one eye on their profit and one eye on cultivating healthy business relationships, not just with their franchisor but with their suppliers, peers and, of course, their customers.

As mentioned, this more concise definition, titled "Franchise Relations," from Michael Seid better summarizes these valued points made:

FRANCHISE RELATIONS

The franchise relationship is designed to be a long-term association designed to meet mutual personal, financial and professional goals. To achieve that level of success, franchisors must be diligent about creating a culture of exchange and open communication. MSA can assist your company in establishing programs of meaningful communications that will enable you to project a consistent message to your franchise community, while tapping into the passions and business savvy of some of your franchisees through formation of advisory committees and programs of recognition. Some methods to establish and improve franchisee relations:

Source Citation:

Kohlbeck, Mark J., Cohen, Jeffrey R. And Holder-Webb, Lori, Auditing Intangible Assets and Evaluating Fair Market Value - the Case of Reacquired Franchise Rights (February 01, 2009). Issues in Accounting Education, Vol. 24, No. 1, 2009.

Franchisee Advisory Council structure and implementation

Communications programs Incentive and motivations programs for franchisees Operating and other manuals and training programs, in print, web based, CD ROM or DVDs designed to protect the brand

Intranet and social media programs. The foundation of any successful franchisor-franchisee relationship begins with a spirit of mutual trust and respect.

1. Summary of reacquired franchise rights.

By all means, currently in the hotspot (with regard to "Reacquired Franchise Rights") is Krispy Kreme Doughnuts. In a nutshell, Krispy Kreme Doughnuts, Inc. chose to venture into an active expansion by means of a franchise reacquisition. Through the implementation of a 2000 Initial Public Offering (IPO), the active expansion and franchise reacquisition program garnered high-visibility of a franchise reacquisition program; from there, their highly controversial accounting issues became quite a broadly implanted associative means.

Krispy Kreme provides an opportunity by which to examine the several technical and conceptual issues in a realistic setting;

Intangible Assets:

"Krispy Kreme Doughnuts Inc. (KKD) Income statement." 2006-12-16. Yahoo! Finance. Web 18 March 2011.

"Company Profile for Krispy Kreme Doughnuts Inc. (KKD)." Web 18 March 2011.

Krispy Kreme Doughnuts, Inc. (the Company) was founded in 1937 in Winston-Salem, North Carolina.

The Company's efforts were concentrated in North Carolina and surrounding states for much of its early life. By 1996, the Company had grown to 95 units (an average of less than two stores per year). "Krispy Kreme's Entire Menu: Zero Grams Trans Fat." 7 January 2008. Reuters.Web 18 March 2011.

The Company developed an aggressive growth plan in the late 1990s.

"Bristol's Krispy Kreme sells 19,000 doughnuts a day." August 14, 2010. Evening Post. Web 18 March 2011.

Jenkins, Scott (2010-07-31). "Cheerwine doughnut now only in Salisbury." Salisbury Post. Web 18 March 2011.

In the early stages, the Company financed this growth by forming alliances with "Area Developers" and retaining minority equity stakes in the developing ventures. Details about the arrangements are provided below.

In 2000, Krispy Kreme boosted its expansion program with an injection of capital from an initial public offering (IPO), in which approximately 3.4 million shares were sold for a total of $65.7 million. Shares traded on NASDAQ, and the firm's stock listing shifted to the NYSE in 2001. The Company increased the number of retail outlets to over 400 by 2004. In the post-IPO period, store sales posted growth of approximately 19% per annum, attributed partially to publicity from the IPO. Despite this growth, the Company captured less than 10% of the U.S. doughnut market. The leader, Dunkin' Donuts, had over 5,000 stores in 2004. Growth in store sales began to slow in 2005.

"Krispy Kreme Doughnuts Inc. (KKD) Income statement." 2006-12-16. Yahoo! Finance. Web 18 March 2011.

The Doughnut Business: Krispy Kreme is a branded specialty retailer and manufacturer of premium quality doughnuts. Its principal business is to own and franchise Krispy Kreme doughnut stores in the U.S. And internationally. The main product is the Hot Original Glazed, a one-of-a-kind doughnut with an established brand. Each outlet also sells over 20 other varieties of doughnuts and coffee products. Product quality and consistency has provided the Company with a very loyal customer base.

Each of the retail stores is a doughnut factory with the capacity to produce between 4,000 and 10,000 dozen doughnuts daily. Each factory store contains a full doughnut-making production line. The factory store is marketed as a unique retail experience, featuring the store's production process, including a doughnut-making theater. The stores also support multiple sales channels to more fully use production capacity. Stores provide Krispy Kreme doughnuts to be sold in satellite locations, ballparks, and grocery stores, and under private label marketing agreements.

Krispy Kreme factory stores are divided into three categories. First, Company stores are owned by Krispy Kreme. Second, the Company has had an Associate program since the 1940s, where stores are owned by franchisees. Associates enter into 15-year licensing agreements to operate stores in a specific territory and are expected to concentrate on operations of existing stores. The third category is an Area Developer program, launched in the mid-1990s, where franchisees have responsibilities to develop new territories in addition to operating existing stores. Development targets pertaining to territory, number of stores, and timing are specified in the Area Developer Agreement.

"Krispy Kreme Doughnuts Inc. (KKD) Income statement." 2006-12-16. Yahoo! Finance. Web 18 March 2011.

Associates pay royalties of 3% on store sales and 1% on all other sales. Area developers have significantly higher costs: they pay royalties of 4.5% to 6% on all sales, and pay development and franchise fees of $20,000 to $50,000 per store. As of February 1, 2004, there were 141 Company stores, 18 Associates operating 57 stores, and 26 Area Developers operating 159 stores. The Area Developers were under contract to open 250 stores over the duration of their contract periods. The Company had a controlling interest in two of the Area Developers, who operated 24 stores and a minority interest in 15 others, who operated 66 stores.

"Krispy Kreme Doughnuts Inc. (KKD) Income statement." 2006-12-16. Yahoo! Finance. Web 18 March 2011.

Krispy Kreme generates revenue from four sources: company stores, franchise fees and royalties from franchise stores, a vertically integrated supply chain, and offsite bakery production separate from the factory store doughnut production. The franchising program lowers capital requirements and provides a royalty stream. The vertically integrated supply chain provides franchise stores with mixes, equipment, and coffee. This arrangement permits individual stores to lower cost of goods sold and the Company to capture additional profit on these sales.

Financial information extracted from Krispy Kreme's 2004 annual report is provided in Exhibits 1, 2, and 3:

Reacquired Franchise Rights (the Rights)

Between 2000 and 2004, the Company embarked on a franchise repurchase plan, stating that it would be easier to maintain consistency and efficiency when dealing with the Company's suppliers and wholesalers. During this period, Krispy Kreme purchased the operations of several Area Developers, including development rights for specific territories. These acquisitions may have also included existing stores owned by the Area Developer. In addition, Krispy Kreme acquired operating stores from Associates. Acquisitions were accounted for as purchases. In a typical acquisition, Krispy Kreme acquired accounts receivable, inventory, prepaid expenses, property, plant and equipment, and reacquired franchise rights subject to certain accrued expenses. The Rights consist of the contractual responsibility to develop new territories and the right to continue operating existing stores.

The Company defines reacquired franchise rights in Exhibit 3 as "the excess of the net amount assigned to identifiable assets and liabilities recorded upon the acquisition of franchise markets." The Rights are stated to have an indefinite life and are reviewed at least annually for impairment or whenever events or circumstances indicate the carrying amount of the asset may be impaired in accordance with SFAS No. 142 (FASB 2001b).

Smith, Shelley (2010-07-01). "Cheerwine filled doughnuts are a hit." Salisbury Post. Web 18 March 2011.

On July 1, 2010, Krispy Kreme introduced a doughnut that included the soft drink Cheerwine, which was to be sold in grocery stores in North and South Carolina during July.

Smith, Shelley (2010-07-02). "Cheerwine doughnuts now at Krispy Kreme." Salisbury Post. Web 18 March 2011.

The doughnuts proved so popular the Salisbury, North Carolina Krispy Kreme location, in the town where Cheerwine is made, sold them as well. After July 31, this was the only place to get them.

In 2010, Krispy Kreme Express, a delivery service for businesses, began testing at the Battleground Avenue location in Greensboro, North Carolina.

Normally, the excess of the purchase price over the fair values of net assets acquired is assigned to goodwill. In this case, the Company followed the residual value approach to provide an initial valuation of the required franchise rights (assigning excess purchase price above the fair value of tangible acquired assets to an intangible other than goodwill). The use of the residual valuation approach was permitted during this time period when obtaining a direct valuation of the intangible was not practical.

Citation: Bollinger, Michael a. CMA, CFM, CPA, CIA, CGFM, CDFM. "Fair value, Accounting procedures." Publication title:

Strategic Finance. Montvale: Mar 2011. Vol. 92, Iss. 9; pg. 25, 1 pages 4K9S4PXGS8 at CALIFORNIA STATE UNIVERSITY - SACRAMENTO MAIN ACCOUNT via ProQuest, an information service of ProQuest LLC.

Implementing Fair Value Accounting

"Welcome to the new world of accounting!" That's the statement that Mark L. Zyla uses to start his book Fair Value Measurements: Practical Guidance and Implementation, and it's a very apt one. Zyla is referring to the increased reliance on fair value accounting by investors and the continued promulgation of accounting standards to address this new world. The growth of fair value accounting is significantly influenced by the increased importance of intangible assets in the economy, the continued increase in business combinations, and, specifically, the increased percentage of intangible assets to total assets on most of the financial statements from companies in the S&P 500.

Zyla is an active practitioner in fair value accounting, and his book leverages his experience and knowledge by providing a useful guide in an articulate and logical manner that truly benefits the reader and those new to fair value measurements and fair value accounting. The book is organized to provide a brief history and overview of fair value accounting and related accounting standards before moving on to methodically discuss the nature and types of intangible assets and the methods for valuing them and their respective remaining useful life. As Zyla leads you through the different issues with the various measuring methodologies, he ties fair value measurements to financial statement reporting and the required disclosures.

Zyla spends whole chapters discussing the different fair value measurement approaches, including cost, market, income, and more advanced valuation methods. For each approach, he discusses the related accounting standards, the pertinent issues of using the approach, and the mechanics of applying it-all while utilizing concrete data to demonstrate the application.

Fair value measurements are based on assumptions and estimates, and it is management's responsibility to document those assumptions and estimates. Zyla reinforces this point with a chapter on auditing fair value measurements. His intention is to inform the reader that fair value measurements are expected, but the value reported is management's assertion -- and management is responsible for its determination and documentation. The auditor's role is to assess whether the appropriate valuation method was used for a particular intangible asset and to test the reasonableness of management's assumptions and estimates.

One of the best aspects of Zyla's book is that, after providing significant information on the various concepts and concerns of fair value accounting, he concludes with an in-depth case study. The case study walks the reader through a scenario that reinforces the concepts learned. Zyla includes a series of 53 questions throughout the case study to help get you thinking about how you would apply fair value accounting. At the conclusion of the case study, he gives suggested solutions based on common valuation techniques-there isn't always one right answer since there are different methods and assumptions based on the valuation specialist.

Zyla's expertise in the field is evident throughout the book, but it's his appreciation of the topic's complexity and how it can be difficult for someone new to the subject that makes his book such a valued resource. It provides an understanding of the topic, concrete practical guidance, and support for those who wish to implement fair value measurements and fair value accounting.

In the case, you will encounter a variety of financial reporting issues -- from identification and valuation of uncommon intangible assets in Part 1, to acquisition accounting, purchase-price allocations, contingent consideration, exit costs, executive compensation, and loan impairments in Part 2. The case is appropriate for use in intermediate and advanced accounting courses.

From this, our best method would be to find a template to learn from and follow as an instructional of what to avoid and how to eliminate facing this

References:

HighBeam Business: Issues in Accounting Education: The hole in the doughnut: accounting for acquired intangibles at Krispy Kreme. Web. 16 March 2011.

Citation: Bollinger, Michael a. CMA, CFM, CPA, CIA, CGFM, CDFM. "Fair value, Accounting procedures." Publication title: Strategic Finance. Montvale: Mar 2011. Vol. 92, Iss. 9; pg. 25, 1 pages 4K9S4PXGS8 at CALIFORNIA STATE UNIVERSITY - SACRAMENTO MAIN ACCOUNT via ProQuest, an information service of ProQuest LLC.

5. Auditor impairment analysis on book value of reacquired franchise rights for Arizona acquisitions. The four present values should allow you to reach a conclusion about the acceptability of the client's impairment analysis. Up to this point you are performing a conventional analysis of accounting estimates as per CAS 540. Become thoroughly acquainted with this CAS and refer to it in your report. Call this conventional analysis, and its conclusion, Part I of your report. It is worth 5 marks. The solution posted in BB for class 7 to the class discussion a&B company case, and the Hilton and O'Brien article in class 6 link may help in doing this part of the assignment.

You can use any accounting standards you prefer to support your conclusions, the U.S. ones mentioned in the case, or comparable CICA Handbook sections, or international standards, but be specific about which ones you are using so that the marker can follow your analysis and give you full credit.

From the International Auditing and Assurance Standards Board, "IAASB Explores Financial Statement Disclosures and Audit Quality; Releases Discussion Paper and Thought Piece

(New York/January 21, 2011). The International Auditing and Assurance Standards Board (IAASB) today released for public comment a discussion paper exploring key issues relating to disclosures in financial statements" (Wilker, 2011).

Furthermore, the International Auditing and Assurance Standards Board (IAASB) Perspective has been suited to "safeguard," if not also nurture, the ever-growing advancement, as might be understood; or else hamper and otherwise impede, as is also frequently accused in regard to anything financial, businesslike, or even political or ever shifting "perceptually pragmatic" within the business realm. Here, the IAASB regards the recent trends and complexity (as of 18 March 2011):

The Evolving Nature of Financial Reporting: Disclosure and Its Audit Implications, the paper highlights recent trends in the range, volume, and complexity of financial statement disclosures, and explores issues and practical challenges in preparing, auditing, and using them. In addition, in order to stimulate further debate on audit quality, and in its continuing efforts to facilitate robust audits in the public interest, the IAASB today also released a publication titled Audit Quality: An

IAASB Perspective.

This IAASB Perspective elaborates as this report sections off into the Financial Statement Disclosures and Audit Quality subsections:

Financial Statement Disclosures

"Over the past several years, we have witnessed a transformation in the nature and extent of disclosures; for example, it is now common to see disclosures that are more forward-looking or qualitative," noted Prof. Arnold Schilder, IAASB chairman. He added, "Such disclosures are critical -- as one investor said to me, 'We care more about the "soft stuff." This development, however, raises important issues and challenges for preparers and auditors alike. Through this discussion paper, the IAASB seeks to better understand different viewpoints on a range of issues about financial statement disclosure practices, as well as the implications from an auditing perspective."

The discussion paper addresses critical issues such as challenges in preparing disclosures, the nature and extent of evidence for different types of disclosures, and the application of the concept of materiality to disclosures. Views from all stakeholders are sought, and the discussion paper asks specific questions of preparers; investors, lenders, and other creditors; regulators; and auditors. A consultation period of over four months has been provided to enable stakeholders to consider the complex issues addressed in the discussion paper.

Audit Quality

"Audit quality is at the heart of the IAASB's mandate to set high-quality auditing standards," noted Prof. Schilder. "However, while our clarified International Standards on Auditing (ISAs) make an important contribution to audit quality worldwide, they are not the only element of audit quality. Also, it has been clear from our various stakeholder outreach efforts that there are many different perspectives on audit quality. This publication aims to help raise stakeholders' awareness of the many different views and influences on audit quality, as well as of the complexity and multifaceted nature of audit quality."

"The publication is intended to stimulate further thought and discussion on audit quality among stakeholders, while recognizing the importance of international consensus on audit quality matters," explained IAASB Technical Director James Gunn. "At the same time, the IAASB recognizes that more can be done to maintain and enhance audit quality. The IAASB will continue to explore how it may do so throughout 2011 and beyond.

Sources:

Katz, Jonathan G. Secretary Commissioner (16 February 2000).

SEC Concept Release: International Accounting Standards. SECURITIES and EXCHANGE COMMISSION. 17 CFR PARTS 230 and 240 [RELEASE NOS. 33-7801, 34-42430; INTERNATIONAL SERIES NO. 1215] FILE NO. S7-04-00 [RIN: 3235-AH65] INTERNATIONAL ACCOUNTING STANDARDS

Pondent, Corr S. "About Reacquired Franchise Rights" (29 December 2010). Highbeam Business: Money. eHow. Demand Media, Inc. Web. 18 March 2011.

Wilker, Laura. IAASB Explores Financial Statement Disclosures and Audit Quality; Releases Discussion Paper and Thought Piece (21 January 2011). International Federation of Accountants. Web. 16 March 2011.

Katz, Jonathan G. Secretary Commissioner (16 February 2000).

SEC Concept Release: International Accounting Standards. SECURITIES and EXCHANGE COMMISSION. 17 CFR PARTS 230 and 240 [RELEASE NOS. 33-7801, 34-42430; INTERNATIONAL SERIES NO. 1215] FILE NO. S7-04-00 [RIN: 3235-AH65] INTERNATIONAL ACCOUNTING STANDARDS