Krispy Cream

Topics: Balance sheet, Asset, Goodwill Pages: 3 (927 words) Published: February 27, 2008
a.1. IHOP Corp (9-30-2002):
Reacquired franchise and equipment held for sale is separated into two parts: current asset and long-term receivables (SEC Government, 2002, Item 1). The company estimates the useful life of the assets, and records the amortization of the asset. For instance, in the quarterly report ended September 2002, amortization on franchise operations is $1,647,000. In this case, the company treats its reacquired franchise rights as intangible assets that have limited lives. 2. Rewards Network Inc. (11-14-2002):

The company classifies franchise rights to goodwill. Because according to SFAS Nos. 141, which indicates that intangible assets not specifically identified and inseparable from the business as a whole (SFAS 141). Most of its business combination is reacquiring franchising rights. In 2002, the company decides that reacquired franchise rights can no long be separable from goodwill by the new standard. The rights are not amortized (SEC Government, 2002, para 7).

b. By asserting that the reacquired franchise asset has indefinite life, Krispy Kreme can expand its economic benefits. On its 2003 balance sheet, the company has reacquired franchise rights as asset that worth $48,502; and as the company continues to reacquire franchise rights, the worth of its asset boosts up to $174,537 the next year (Exhibit 1). In addition, because the rights have indefinite life, they do not have to be amortized. Net income becomes greater. One factor that suggests that Krispy Kreme's franchise rights have indefinite live is that these rights are "the excess of the net amount assigned to identifiable assets and liabilities recorded upon the acquisition of franchise markets" (Exhibit 3). The identifiable assets have already been amortized. Franchise rights are classified as some intangible assets that have not been identified, and there is no standard to how much is the amount to be amortized. The company then does not subject them to...
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