Krispy Kreme Doughnuts

KRISPY KREME DOUGHNUTS

Question 1

Explain how the accounting treatment as outlined relating to the buyback of franchises, especially the repurchase of the struggling franchise chain in Michigan, has led to the SEC’s investigation.

Krispy Kreme Doughnuts was investigated by the SEC due to the company’s reacquisition of franchises in Michigan, and the sudden declining of share prices that had raised a number of shareholder legal actions and the company’s immediate boosted earnings.

The SEC’s investigation indicated that “Krispy Kreme payed more for the buyback so that the franchise could pay overdue interest on a company loan, a payment that immediately boosted earnings.” (Farrell,G 2004, ‘Investigating dunks Krispy Kreme’, USA Today,30 July, p. 1B Krispy Kreme Doughnut Corporation website http://www.krispykreme.com)

Because in our case study Krispy Kreme agreed to pay more for the buyback of the franchises that meant that the franchisee could pay back overdue interest that it owed and to cover additional cost like property plant and equipment, ingredients and franchise fees.

Krispy Kremes collection of the unpaid interest resulted in an immediate increase in profits in the form of interest income; the cost was rolled into the purchase price and reported on Krispy Kreme’s balance sheet as an intangible asset that did not affect the company’s earnings.

This was “Because much of the buyback outlay pays for the plant and equipment, most food chains amortise this cost over several years. Krispy Kreme doesn’t.”

(Farrell,G 2004, ‘Investigating dunks Krispy Kreme’, USA Today,30 July, p. 1B Krispy Kreme Doughnut Corporation website http://www.krispykreme.com .

Due to this depreciating the assets would both trim the value of assets that Krispy Kreme carried on its balance sheet and reduce profits, because amortization is taken as a non-cash charge against earnings. (Groom,N 2004, “Krispy Kreme franchise buybacks are questioned”, USA Today, viewed 8th April, 2010,...