Retail Food Group – Annual Report Analysis And Investor Relations

Retail Food Group’s Business Activities

1. a) Retail Food Group started its business in 1989 in the business of 50 Donut King and bb Café Stores. Currently the company is having around 2,500 outlets. The company is the proud owner of Donut King, Cafe2u, The Coffee Guy, Brumby’s Bakery, Gloria Jean’s Coffees, Crust Gourmet Pizza and Michel’s Patisserie franchise systems. Currently company’s various franchise systems are well known household names. Apart from it is also involved in the business of third party accounts under the Roasting Australia, Di Bella Coffee and Evolution Coffee Roaster Brand and also wholesale supply of existing coffee roaster brand systems. Company had also built highly skilled support network so that its franchise systems should be a success.(RFG, 2017)

b) RFG discloses in its financial statements the notes to operating segment information. For such management purposes RFG has been categorized into seven major operating divisions. The operating divisions are mentioned below:

1. Brumby’s Bakery Brand System
2. Donut King Brand System
3. Michel’s Patisserie Brand System
4. Coffee and Allied Beverage
5. Coffee Retail System
6. Mobile System
7. QSR Systems

AASB 8 ‘Operating Segments’ states that a company needs to disclose all its segments, if it is divided into various segments, in the financial statements. The identification can be done by the internal parts of the Group that get  reviewed on a regular basis by the chief operating decision maker, so as to assess the performance and also proper allocation of the resources into segments.

Internal operations of the management define the operating segment.  It is thus necessary to reveal the measure of the performance of each section of the said company.

2. a) Share Capital is the amount that the investors often invest in the company. It is a fund that the company generally raises in exchange of its own shares. If the company ever desires to get more shares, it needs to get hold of proper authority to sell and issue more shares by increasing the company’s share capital.

b) There has been change in the Share Capital of the company over the years because of the different acquisitions by the company. A company issues shares to its shareholders when it acquires any other company. This would lead to a rise in the share capital of the company making it the main reason as to why there is change in the share capital.

c) The accumulated profits that a company has are included in the reserve account of the company. The account is set up so that fixed assets can be purchased by the company,  bonuses can be paid, debts can be paid off or any such repairs and other stuffs can be taken care of. The main idea behind maintaining this account is to prevent the use of funds for such other purposes like buying back of shares or even paying of dividend.

Segment Reporting and Operating Segments

d) Retained Earnings reported by RFG for the year ended 30^th June 2015 was $87,455,000 and for the year ended 30^th June 2014 was $87,972,000. It shows the accumulated profit or loss of the company. RFG has profits mentioned above.

e) Retained earnings are the profits earned by the company that have been accumulated together till date and the losses incurred till date fall into the accumulated losses till date that the company has earned.

3. a) The profit earned before the income tax for the company has been paid, for the year ended 30^th June 2015 was $48,384,000 and for the year ended 30^th June 2014 was $52,751,000.

b) The income tax for the year ending 30^th June 2015 was $14,165,000 and for the year ended 30^th June 2014 was $15,890,000.

c) In the given question we need to find if the company made profit or loss for the year ended 30^th June 2015.

Company had made a profit of $48,384,000 for the year ended 30^th June 2015. This profit is before tax. The income tax rate applicable in Australia for the year ended 30^th June 2015 was 30%. Thus, income tax of the company should be 30% of $48,384,000 = $14,515,200. But the actual income tax expense by the company was $14,165,000. There is a difference of $350,200. Company had shown less amount in its financial statements by $350,200. This difference is because of the deferred tax asset. Company was having a deferred tax asset on which company had already charged income tax. Since income tax has already been charged by the company on that amount, there is no need for the company to charge tax on it again as it would lead to double taxation. To avoid this situation the company needs to charge in its financial statements lesser amount.

d) Tax that was paid to the Australian Taxation Office by the company was different from the tax that was reported by the company in the financial statement. In most of the cases the amount will be different. The tax that has been calculated from the profit that was earned before tax is the tax that was reported in the financial statement. Advance tax would paid by the company in the beginning of the year. Thus, this advance tax should be deducted in the financial statement from the income tax reported. Some life insurance premium or such other deductions would be taken up by the company as well. Thus this needs to be deducted from the company’s gross total income. The statement mentioned below explains the difference between the tax paid actually and the tax that was reported in the financial statements.

Share Capital and Contributed Equity

Statement of Comparison

1. a) In order to have a win win investor investee relationship there should be an alignment between both of them. Alignment can only be there when the below given four factors are properly applied:

• Understanding Investor Needs: it is essential to understand the needs of the investor. Factors which are looked in this case are mission/values and management capacity.
• Understanding Investee Needs:the win win situation can be achieved when both investors and investees need are fulfilled. A win win situation will not be achieved even if one is not fulfilled.
• Terms and Conditions needs to be defined:It is necessary to define all the terms and conditions before getting into any relationship.
• Misalignment ought to be identified:Any misalignment if seen between investee and the investor, it needs to be first aligned.

b) In the corporate world the term Control is a very relevantly used word. If a company is holding more than 50% shares of a company, that company is said to be holding the other company. The holding company is the company that is controlling other company and the subsidiary company would be the one getting controlled.

Significant influence and control are different. A company with significant influence over other company means that company is holding around 26% – 49% shares of the other company. In this case the company can influence the decisions of the other company, but cannot take any decision on its own. For decision-making a company needs to have control over other company, but not significant influence.

c) RFG has various subsidiaries under it. It is not possible to list all the subsidiaries. Hence some of the subsidiary companies are listed below:

• BDP Franchise Pty Ltd
• Booming Pty Ltd
• Café Coffee Pty Ltd
• Jireh Group Pty Ltd
• DBC Services Pty Ltd
• DK China Pty Ltd
• PRCH Holdings Pty Ltd
• Donut King (NZ) Limited
• Praise Operations Company LLC
• TCG Franchising Limited

d) Consolidated financial statement needs to be prepared by a company when it is the holding company of many other companies. It needs to be prepared at the end of the every quarter and at the end of every financial year. A consolidated financial statement needs to be prepared when the management needs it.

AASB 10 ‘Consolidated Financial Statements’ states that consolidated financial statements are to be prepared by a company that holds various other companies. This means that a holding company essentially needs to prepare the consolidated financial statements. This means that such situations will arise when a subsidiary company might also be a holding company for other companies. In such a situation even a subsidiary company needs to prepare the consolidated financial statements. In simple words a company needs to prepare a consolidated financial statement if it is holding any other company.

e) The steps involved in preparation of consolidated financial statements are given below:

1. First determine that which holding company needs to be reported as subsidiary company.
2. All the information needs to be taken from all the subsidiaries of the holding company.
3. It needs to be ensured that companies follow same fiscal periods.
4. Need to locate that which is a subsidiary company and which is just an investment company. Both needs to be kept separately.
5. Minority Interest and goodwill is to be calculated for the holding company. Minority interest is the amount that is not held by the holding company.
6. All the items in the financial statement are to be consolidated.

In the consolidation method both parent and the subsidiary company are seen on a single set of combined financial statements. Whereas under the equity method of accounting, parent company’s financial statements include a line for the investment in the subsidiary which is equal to the owned share of the subsidiary company’s net assets.(AASB, 2017)

f) Acquisition process is when in the process of consolidation either one company invests in the other company or takes over the other company. After a company has acquired another company, checks need to be made to find if the price that was paid was more than the company’s net assets or not. If the price that had been paid was found to be more than its difference, it is taken to be as goodwill. On the other hand if the price that was paid was found to be lesser than the assets then the reserves would be their difference.

Reserve Accounts and Retained Earnings

Some of the assets get revalued in the consolidation process. The reason behind it is that during the time of the assets the value should be different. It needs to be at the fair market value.

g) RFG has not held any such associates.

h) As per AASB 11 ‘Joint Arrangements’ an arrangement in which there are two or more parties that have joint control is a joint arrangement. The main features of joint arrangement is given below:

• Both the parties are generally bound by contractual agreement.
• This contractual arrangement gives the parties joint control of the arrangement

A joint arrangement can be a joint operation or a joint venture.

A joint arrangement where there is joint control of the arrangements by both the parties is termed as joint operation. In joint operation the parties have the right to the obligations and also the assets and further obligation for the liabilities that are related to the arrangement. These parties that are mentioned above are called the joint operators.

On the other hand a joint venture is a joint arrangement where both the parties to the arrangement have joint control and the rights to the net assets of the arrangement. Such parties are termed as joint ventures.

i) RFG is not to be considered as a part of the joint arrangement.

2. a) Goodwill is an intangible asset which arises when there is acquisition of one company by any other company at premium. The value of company’s patents, brand, and technology represents goodwill.

Goodwill needs to be calculated as- Consideration transferred +Amount of non-controlling assets +fair value of previous equity assets – net assets recognized.

b) Goodwill needs to be stated in the financial statements of a company. The Balance sheet of the company needs to contain the Goodwill. In the Balance Sheet, goodwill needs to be mentioned under the heading of Intangible Assets.

c) The consolidated financial statements of the company carry the goodwill. Goodwill is being carried by it as the company has acquired several other companies. With time the Goodwill will change due to different deletions and/or acquisitions. Goodwill has to be removed if a company does not hold any other company anymore. On the other hand, the goodwill of a company will increase if it acquires more companies. There have been instances when the amount of goodwill has been revalued because of the fair market value.

References

AASB, 2017. aasb.gov.au. [Online]
Available at: https://www.aasb.gov.au/admin/file/content105/c9/AASB10_08-11.pdf
[Accessed 23rd April 2017].

RFG, 2017. www.rfg.com.au. [Online]
Available at: https://www.rfg.com.au/images/investor_docs/RFG2015AnnualReport.pdf
[Accessed 23rd April 2017].

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