Auditing Reacquired Franchise Rights

Auditing Reacquired Franchise RightsWorksheet 1 Summary of Reacquired Franchise RightsVerifying Mathematical Accuracy of Reacquired Franchise Rights remainderIt has been assumed that the beginning balance of reacquired dealership rights was audited last year. Therefore, changes (if all) to this account be audited in the current year so that an auditor can institutionalize an opinion on the balance of this plus. Reductions to this asset ar likely to be due to a sale, other disposal, or impairment. However, found on the baptismal font facts, there is no indication of changes in the current year. The following were the procedures performedChecking to mind if the client reported any impairment found on the suit facts, papist vacation did non identify or report any impairment in the reacquired certify rights in the current year.Ensuring that each Franchisee commercialise recorded the correct amount for the BV of Reacquired Franchise Rights Roman spend did not sell or dis pose any of its reacquired franchise rights (reductions)neither did they reacquire any refreshful franchise rights (additions) during the current year. This is the reason that there was no change in the recorded amount for these assets.Verifying that the lodge correctly added the take hold value of the reacquired franchise rights to include all of the senior franchise markets (please refer to accessory A) Upon reviewing the client-prepared schedule of reacquired franchise rights, the sum of the keep values of these intangible assets, for each franchise market, jibeed $127, 414, 000. However, there is a $2,000 ($127,414 127, 412) battle between the actual total and the amount that the client reported on its balance sheet ($127, 412, 000). Since, a planned materiality of $5 million is being used this deviation is sassy and islikely due to rounding errors.Based on the above procedures performed and the immaterial deviation between the actual total and the clients reported amo unt for the book value of the reacquired franchise rights, we feel that the proper amount has been recorded and as such no further procedures are necessary.Is the Indefinite life-time miscellanea for the reacquired franchise rights correct?According to SFAS 142, it identifies how goodwill and other intangibles are accounted for by and by their acquisition or in this case their reacquisition. Essentially, it requires the miscellanea of intangible assets as having either a definite or indefinite life. The main difference is that definite-life intangible assets are amortized in a pattern depending on how and when the economical benefits are judge to be received (e.g. if pass judgment evenly oer each year then the straight line method of amortisation should be used). In determining whether or not the indefinite-life classification for the reacquired franchise rights is correct we must review through the criteria in SFAS 142 and see how it relates to our client, Roman Holiday. A ccording to SFAS 142, the estimate of the utilitarian life of an intangible asset to an entity is based on an analysis of all pertinent factors, in particular the followingiThe expected use of the asset by the reporting entity encase facts Essentially, the purpose of reacquired franchise rights is to allow the franchisor (Roman Holiday) to utilize their own brand name in the particularized senior franchisee market(s) that they reacquired the rights from.The expected useful life of another asset or a group of assets to which the useful life of the intangible asset whitethorn relate (such as mineral rights to depleting assets)Case facts The group of assets that the reacquired franchise rights may relate to is the reacquisition of rights from actual and/or underdeveloped markets or restaurants. Under the contractual repurchase agreement, which has a useful life of 14 years, Roman Holiday is entitled to the use and benefit of these assets (e.g. the right to continue operating existin g restaurants and the right to collect royalties from sub-franchises developed by the Senior Associate)Any legal, regulatory, or contractual provisions that may limit the useful lifeCase Facts same as part ii. (i.e. The contractual agreement has a useful life of approximately 14 years which is the same length of the inherent Senior Associate agreement)Any legal, regulatory, or contractual provisions that enable renewal or extension of the assets legal or contractual life without substantial cost (provided there is evidence to support renewal or extension and renewal or extension can be fulfil without material modifications of the existing terms and conditions)Case facts The Senior Associate correspondence has a useful life between 10-20 years (approximately 14 years). These agreements are renewable if mutually agreeable to both parties with no substantial be or material modifications of the existing terms and conditions.The effects of obsolescence, demand, competition, and other economic factors (such as the stability of the exertion, known technological advances, legislative action that results in an uncertain or changing regulatory environment, and expected changes in dispersal channels)Case facts According to analysts, the companys growth will slow (indicating that the pizza industry is in its maturity stage) in the next few years barely will still exceed industry averages. However, most of Roman Holidays tax growth, in recent years, is largely due to the reacquisition of franchise rights and existing restaurants as opposed to real growth in the franchise itself. Therefore, Roman Holiday faces stiff competition in this highly competitive industry. In addition, the company markets itself as a gourmet pizza restaurant and only targets consumers spontaneous to pay for a premium product. There are may taciturnity pizza places that consumers can go to such as Pizza shack and Dominos Pizza unless Roman Holiday can continue to branch itself from these o ther restaurants (e.g. incentives and price discounts).The level of maintenance expenditures mandatory to obtain the expected future cash flows from the asset (for example, a material level of required maintenance in relation to the carrying amount of the asset may bring up a very limited useful life)Case facts There is no maintenance expenditures related to reacquired franchise rights except annual impairment losses, if any.Based on the above pertinent criteria related case facts, we feel that the indefinite-life classification is wrong. Instead, it should have a definite life of 14 years, which is consistent with the be Senior Associate agreement. Beyond 14 years the intangible asset and its related benefits will expire.Worksheet 2 Auditee client impairment analysisSFAS 142 vs. SFAS grossTypes of Auditing Procedures to Evaluate Managements AssertionsClients Methodology in Estimating the FV of Reacquired Franchise RightsVerifying the mathematical trueness of the clients estimati on the FMV of Reacquired Franchise RightsWorksheet 3 Analysis of key assumptionsKey assumptions do by client in arriving at the FMV EstimateComparison to remote internal informationWhich provides the greatest level of assurance?Information sources set of a document request to the clientEvaluating of key assumptionsEvaluation of appropriateness of key assumptionsWorksheet 4 Auditor impairment analysis on book value of reacquired franchise rights for Arizona acquisitionsIs Clients Impairment Assessment Appropriate?The single-valued function of specialistsWhat would be included in a set of working papers?