Krispy Cream

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 amortization. However, franchise rights may have economic and legal life, which may limit the life of the reacquired rights. Therefore, these franchise rights should be amortized.

The company deducted the value of tangible acquired assets from purchase price. This means that other than worth of the tangibles, all the excess are subjected to intangible assets. On the other hand, goodwill is purchase price deducts net asset. Net asset is total assets deduct total liability (Net Asset), which not only include tangible assets, but also intangible assets. Therefore, net asset generally has greater value than tangible assets. Krispy Kreme calculates franchise rights by reducing only tangible assets, and yields to a greater amount of intangible asset. Like goodwill, the excess of the net amount assigned to identifiable assets and liabilities by acquisition of franchise markets does not have to be amortized (SFAS Ns. 142).

c. For Krispy Kreme's reacquired franchise rights, impairment occurs when the assets' fair value is less than the cost recorded. There are different ways this can happen. For example, if the company has a property damage, which result in decreasing in the company's overall asset value; decline in business which leads to the company's decrease in fair market value, or market values of property decrease can all lead to impairment of the assets.

To estimate market fair value, the company can use cash flow information and present value method (CPA Journal,2006, para 5). It