2 Donut Express PLC (Donut) is a listed franchise provider. Donut supplies resources to fresh donut shops that then sell donuts to the public. Donut supplies business advice and sales systems. And Donut provides the raw dough and deep fat fryers required to make the donuts. And perhaps most importantly Donut licences the brand "Donut Express" to the franchise customers and supports the brand value by advertising. But it is the independent franchise customers that actually sell the donuts to the public. The directors' pay includes a share-based payment reward scheme using options. You are the newly hired financial controller (FC) and report to the finance director (FD) who is one of three executive directors that sit on a main board of nine. Brands Donut have capitalised advertising expenditure supporting the brand "Donut Express" since Donut incorporated ten years ago. The balance on the current statement of financial position is $10 million and includes $1 million of current advertising expenditure spent in the current year. When a colleague asked about the policy the FD replied "Yes, as I remember the rules, adverting is capitalised when spent." Donut have a further intangible balance of $3 million on the statement of financial position representing software purchased to schedule telephone orders. The system was newly implemented at the start of the current financial year and replaced a system that had lasted only two years. The system before that lasted seven years. When another colleague asked about depreciation the FD replied, "It is really difficult to estimate the life of the system. I think maybe three years would be a reasonable guess. But because the lives of predecessor systems have been so variable the asset life qualifies as 'indefinite life' under the rules and therefore depreciation does not apply." (5 marks) Group Sales Donut is the parent in a small group of three wholly owned subsidiaries. The subsidiaries perform ancillary tasks that help the parent provide franchise services. The group revenue of $100 million fairly represents the sales of franchise services to franchise customers by Donut. However, Donut has close relationships with all franchise customers and has been informed by the franchise customers that their combined sales of donuts under the "Donut Express" brand was $350 million. Donut reports to shareholders using an Annual Report (AR) and an Integrated Report (IR). The AR comprises Management Commentary (MC) and Financial Statements (FS). The IR integrates the messages in the AR into a brief picture of the value creation process at Donut. In both the MC and the IR the key figure discussed is "Group Sales". This is the sum of the Donut group revenue and the franchise customer revenue. The figure of $450 million for "Group Sales" is described as a "pleasing success given the hard economic conditions on the high street". The MC and the IR do not mention the group revenue of $100 million. When a corporate communication advisor asked about the figure the FD replied, "Well, of course, Group Sales is not actually the sales of our group; but who cares so long as the share price goes up." (6 marks) Required: (a) Discuss how the above items should have been recorded in the corporate communications for the current year. (11 marks) Note the mark allocation in the scenario above. (b) Discuss the ethical issues arising from the scenario, including any actions which the FC should undertake. (7 marks) Professional marks will be awarded for clarity and quality of discussion. (2 marks) 2 Donut Express PLC (Donut) is a listed franchise provider. Donut supplies resources to fresh donut shops that then sell donuts to the public. Donut supplies business advice and sales systems. And Donut provides the raw dough and deep fat fryers required to make the donuts. And perhaps most importantly Donut licences the brand "Donut Express" to the franchise customers and supports the brand value by advertising. But it is the independent franchise customers that actually sell the donuts to the public. The directors' pay includes a share-based payment reward scheme using options. You are the newly hired financial controller (FC) and report to the finance director (FD) who is one of three executive directors that sit on a main board of nine. Brands Donut have capitalised advertising expenditure supporting the brand "Donut Express" since Donut incorporated ten years ago. The balance on the current statement of financial position is $10 million and includes $1 million of current advertising expenditure spent in the current year. When a colleague asked about the policy the FD replied "Yes, as I remember the rules, adverting is capitalised when spent." Donut have a further intangible balance of $3 million on the statement of financial position representing software purchased to schedule telephone orders. The system was newly implemented at the start of the current financial year and replaced a system that had lasted only two years. The system before that lasted seven years. When another colleague asked about depreciation the FD replied, "It is really difficult to estimate the life of the system. I think maybe three years would be a reasonable guess. But because the lives of predecessor systems have been so variable the asset life qualifies as 'indefinite life' under the rules and therefore depreciation does not apply." (5 marks) Group Sales Donut is the parent in a small group of three wholly owned subsidiaries. The subsidiaries perform ancillary tasks that help the parent provide franchise services. The group revenue of $100 million fairly represents the sales of franchise services to franchise customers by Donut. However, Donut has close relationships with all franchise customers and has been informed by the franchise customers that their combined sales of donuts under the "Donut Express" brand was $350 million. Donut reports to shareholders using an Annual Report (AR) and an Integrated Report (IR). The AR comprises Management Commentary (MC) and Financial Statements (FS). The IR integrates the messages in the AR into a brief picture of the value creation process at Donut. In both the MC and the IR the key figure discussed is "Group Sales". This is the sum of the Donut group revenue and the franchise customer revenue. The figure of $450 million for "Group Sales" is described as a "pleasing success given the hard economic conditions on the high street". The MC and the IR do not mention the group revenue of $100 million. When a corporate communication advisor asked about the figure the FD replied, "Well, of course, Group Sales is not actually the sales of our group; but who cares so long as the share price goes up." (6 marks) Required: (a) Discuss how the above items should have been recorded in the corporate communications for the current year. (11 marks) Note the mark allocation in the scenario above. (b) Discuss the ethical issues arising from the scenario, including any actions which the FC should undertake. (7 marks) Professional marks will be awarded for clarity and quality of discussion. (2 marks)