The following information comes from the 2009 financial statements of McDonald’s
ID: 2492076 • Letter: T
Question
The following information comes from the 2009 financial statements of McDonald’s Corporation.
Conventional franchise arrangements generally include a lease and a license and provide for payment of initial fees, as well as continuing rent and royalties to the Company based upon a percent of sales with minimum rent payments that parallel the Company’s underlying leases and escalations (on properties that are leased). Under this arrangement, franchisees are granted the right to operate a restaurant using the McDonald’s System and, in most cases, the use of a restaurant facility, generally for a period of . These franchisees pay related occupancy costs including property taxes, insurance and maintenance. Affiliates and developmental licensees operating under license agreements pay a royalty to the Company based upon a percent of sales, and may pay initial fees.
The results of operations of restaurant businesses purchased and sold in transactions with franchisees were not material to the consolidated financial statements for periods prior to purchase and sale.
Revenues from franchised restaurants consisted of:
McDonald’s, 2009, 10K Report
Future minimum rent payments due to the Company under existing franchise arrangements are:
McDonald’s, 2009, 10K Report
This amount represents the future minimum payments that McDonald’s expected to receive from its franchisees as of December 31, 2009.
Using the element definition from the conceptual framework, should this be recorded as an asset in McDonald’s 2009 balance sheet? Why or why not?
If your answer in part (1) is yes, what measurement attribute should be used in reporting the asset?
Explanation / Answer
(As per 10-K report)
The use of the restaurant facility, generally for a period of 20 Years.
Revenues from franchised restaurants consisted of: $ 7286.2 millions in 2009
Future minimum rent payments due to the Company under existing franchise arrangements are : $ 11846.8 Millions in 2009
Using the element definition from the conceptual framework, this future minimum rent receivables under the franchise agreement,are fit to be recorded as an asset in McDonald’s 2009 balance sheet - for the following reaons:
Suggested definition of an asset of an entity under the Conceptual Framework Is:A present economic resource controlled by the entity as a result of past events where ,economic resource is explained as a right, or other source of value, that is capable of producing economic benefits.
In that sense future rent payments are assets , in the sense that they are present source of economic value, that are capable of producing economic benefits ( Cash flows in future) to the Company as a result of the already existing franchise arrangements-that were the result of past managment decisions.
Moreover, there is a definite probability about these rent receipts and also reliability of the cash flows, due to the existing /past agreement - that leads to recognising it as the asset to the entity.
2. Having said that minimum rent payments due to the company should be recorded as assets in MCDonald's balance sheet , measurement attribute that should be used in reporting the asset will be the present value of future cash flows in this respect. This will discount the future big cash flows to the realistic present - so as to reflect a true and fair figure.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.