Module 3 – Assignment 5 Practice Case Examination Backgrounder
The background information relating to the Case Examination (Backgrounder) is provided to candidates in advance of the examination date. The Backgrounder contains information about both the company and the industry involved in the case. Candidates are expected to familiarize themselves with this information in preparation for the analysis that will be required during the Case Examination. Candidates should note that they will not be allowed to bring any written material, including the advance copy of this Backgrounder, into the examination centre. A new copy of this Backgrounder, together with Additional Information about the company and a supplement of formulae and tables, will be provided at the writing centre for the Case Examination. Only the following models of calculators are authorized for use during the Case Examination: 1. Texas Instruments 2. Hewlett Packard 3. Sharp TI BA II Plus (including the professional model) HP 10bII+ (or HP 10bll) EL-738C (or EL-738)
Candidates are reminded that no outside research on the industry related to this case is required. Examination responses will be evaluated on the basis of the industry information provided in the Backgrounder and the question paper (Additional Information).
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Backgrounder
Practice Case Examination – M3A5
RomaCorral Foods Ltd. (RCFL) Backgrounder
Overview
RomaCorral Foods Ltd. (RCFL) is a Canadian public company listed on the Toronto Stock Exchange (TSX) but controlled by its parent company – Entertainment, Food, and Leisure PLC (EFL), a British public company listed on the London Stock Exchange (LSE). The parent company reports under International Financial Reporting Standards. RCFL owns and operates two chains of restaurants in Canada. One chain specializes in Italian cuisine (Roma Italian) and the other in mid-level steak house cuisine (Corral Steak House).1
History
Parent Company – Entertainment, Food, and Leisure PLC (EFL) EFL is one of the largest companies in the hospitality business worldwide. Incorporated in England in 1896, EFL was listed on the LSE in 1952. The company’s European operations include a few hotel chains, several restaurant chains, and a chain of coffee shops. In Canada, EFL owns 75% of the common shares and all of the preferred shares of RCFL. EFL also operates in China, Dubai, the Netherlands, the Republic of Ireland, and Singapore. EFL is profitable but heavily leveraged, primarily because of shareholder pressure to maximize dividends and share value. The following table provides some summary data. EFL Data for the Fiscal Year Ended June 30, 2010 (Dollar amounts are in Canadian dollars, converted from pounds sterling at 1£ = $1.90) Operating revenue Operating profit before interest and taxes Interest expense – net Tax expense Net income Net working capital (current assets - current liabilities) Shareholders’ equity Outstanding common shares Fully diluted earnings per share Basic earnings per share (continuing operations) $1,734 million $428 million $127 million $96 million $205 million $420 million $648 million 247 million $0.66 per share $0.83 per share
At the annual meeting in 2004, after a difficult year, a decision was made to replace the three senior executives at EFL. This change in leadership resulted in a review of the
1
This is a fictitious case and is not based on any actual restaurants with the Roma or Corral name. CMA Canada
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company’s objectives and operating practices as well as a new focus: improve profitability by expanding the main contributors to profit and by divesting the properties with lower profitability. Accordingly, the least profitable of the hotels and restaurants were divested and the European coffee shop chain was expanded. The board of directors also set the following new targets: increase after-tax profit by 20% per year and obtain an average return on investment of 10%. An additional part of the new approach was the decision to expand to North America by establishing restaurant chains similar to the two most popular EFL brands in Europe, which feature family-oriented Italian and mid-level steak house cuisine. The company opened a modest office in Winnipeg, headed by Edgar Fortune, Vice-President of Development, and started investigating the possibility of acquiring a suitable group (or groups) of restaurants as a base for this North American expansion. At the same time, rather fortuitously, a well-established but stagnant North American company was attempting to divest a Canadian subsidiary, YRK Ltd., that owned and operated 54 restaurants located primarily in the major cities of Alberta and British Columbia. These establishments were mainly family-oriented but had little corporate marketing support and lacked a widely recognizable brand. Fortune and his team felt that the restaurants could easily be adapted to the family-oriented, Italian food model. With the full backing of EFL’s board of directors, EFL acquired all of YRK Ltd.’s shares on January 1, 2006, and immediately filed to change the name to RomaCorral Foods Ltd. The new company was provided with the following mission statement: RomaCorral Foods Ltd. provides Canadian consumers with excellent food and refreshments at good value and in comfortable, relaxing surroundings while providing its investors with above-average returns through operational efficiency and selective, aggressive growth. In addition, RCFL adopted the following vision statement: RomaCorral restaurants are the preferred choice of North American consumers seeking high-quality food and refreshments at affordable prices. RomaCorral Foods Ltd. (RCFL) In the first six months of 2006, RCFL renovated most of the acquired restaurants to reflect the Roma Italian brand, sold a few locations, and closed the remainder. EFL’s Winnipeg office was converted to a fully staffed head office for RCFL, and modest regional offices were established in Vancouver, Red Deer, Toronto, Montreal, and Halifax. In July 2006, RCFL was listed on the TSX and the new company adopted a June 30 year-end. In the initial public offering, EFL acquired 75% of the common shares, and more than 50 individuals obtained substantially all of the remaining common shares through pre-subscription.
CMA Canada
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By the beginning of 2007, RCFL was operating 40 Roma Italian (Roma) restaurants and was preparing to open 8 new outlets across Central and Eastern Canada. At the same time, in alignment with its mission statement, the company established a chain of steak houses using financing provided by EFL. An initial six Corral Steak Houses (Corral) – a version of EFL’s most successful restaurant brand in Europe – opened in conjunction with six of the eight new Roma locations. Steady growth occurred for the next three years. By June 30, 2010, there were 70 Roma and 24 Corral restaurants in mid- to large-sized cities throughout Canada. In late 2010, Fortune was recalled to EFL’s head office and Raymonde Plante became President and CEO of RCFL. Plante felt it would be wise to revisit RCFL’s operating strategies and, together with the board of directors, developed a high-level environmental scan (see Appendix 1). Given the uncertain economic climate, the board decided to reduce the pace of expansion to six new outlets in 2011. The following chart illustrates RCFL’s historical growth: RCFL Growth in Number of Restaurants 2011 70 2 24 4 100 Fiscal Year 2010 2009 63 56 7 7 18 12 6 6 94 81 2008 48 8 6 6 68
Roma – at the beginning of the year Roma – opened during the year Corral – at the beginning of the year Corral – opened during the year Total at the end of the year
The Canadian Food Service Industry2
The food service industry is a large, dynamic, and innovative sector of the Canadian economy. Every day, millions of consumers, tourists, and business travellers enjoy the hospitality provided by Canada’s 87,000 restaurant, cafeteria, snack bar, pub or catering locations. Total food service sales in Canada have grown from $55.5 billion in 2006 to $60.1 billion in 2010, representing almost 4% of Canada’s gross domestic product. The main segments in the food service industry and their market shares (shown as percentages) are as follows: 1. Full-service restaurants (35%) – Licensed and unlicensed fine-dining, mid-level, casual, and family restaurants as well as restaurant/bar combinations. 2. Limited service restaurants (34%) – Quick-service (fast-food) restaurants, coffee shops, cafeterias, food courts, and takeout and delivery outlets.
2
The majority of the industry data is taken from the Canadian Restaurant and Foodservices Association website, http://www.crfa.ca; accessed January 14, 2014. CMA Canada
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3. Social and contract caterers (6%) – Caterers supplying food services to institutions, airlines, railways, recreational facilities, and special events. 4. Drinking establishments (4%) – Bars, taverns, pubs, nightclubs, cocktail lounges, and other establishments that primarily serve alcoholic beverages for immediate consumption and may also provide limited food service. 5. Other food service providers (21%) – Hotels, motels, resorts, hospitals, schools, prisons and other institutions, department store cafeterias, vending machines, stadiums, movie theatres, street vendors, private clubs, seasonal entertainment operations, etc. One of Canada’s largest employers, the food service industry provides jobs for approximately 1.1 million Canadians; this represents 6.4% of total employment. A large portion of food service jobs are either entry-level or part-time positions. Nearly one in five youth jobs in Canada is of this type and approximately 44% of food service employees are under the age of 24. Staff turnover is high in the industry, averaging 67% annually for hourly paid employees in quick-service and casual or family restaurants. From 2004 to 2007, the average Canadian household spent 24.7% of its food and beverage dollars on food services and the remaining 75.3% at grocery and liquor stores. Most restaurant customers are price conscious and expect to receive value for their money. They also expect to be treated courteously and served in a timely fashion, in keeping with the nature and purpose of the restaurant visit. Independent brands account for 65% of Canadian restaurants. The remaining 35% are chain outlets. Approximately 60% of new restaurants survive past their second year and only 22% to their ninth year or longer. The following are considered the main reasons for a restaurant’s success: appropriate location and offerings for the target market, consistent quality of food and service, and effective capitalization. Supply chain management is essential to ensure high-quality food while controlling costs. Scheduling is another important factor in cost control, given that labour must correspond to demand. Individual restaurants have a wide range of operating results, as shown in the following table: Restaurant Financial Data as a Percentage of Sales – Industry Ranges Food, beverages, and other direct materials Wages and benefits Operating expenses Occupancy expenses (rent, insurance, utilities, etc.) General and administrative expenses Income (loss) before interest, amortization, and taxes 25% to 40% 25% to 40% 7% to 13% 4% to 14% 1% to 5% (1.5%) to 19%
Average net profit margin in the Canadian food service industry slowly improved from a low of 3.2% in 2003 to 4.5% in 2006 before declining to 4.3% in 2007.
CMA Canada
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In 2008, despite falling consumer confidence and growing fear of a recession as the year drew to a close, Canadian households continued to dine out. From September to November, consumer spending increased by 4% over the same period in 2007. Spending increased at chain restaurants by 6.2% and at independent restaurants by 0.5% during this period. Fast-food restaurants experienced an increase in sales of 5.3% and full-service restaurants an increase of 3.6%. Within the full-service category, increased consumer traffic led to higher spending of 6.6% at casual restaurants and of 3.5% at family/mid-level restaurants; decreased traffic at fine-dining establishments resulted in reduced spending of 14.6%. Since 2005, world food prices have increased dramatically, and the cost of wheat, which is used worldwide to make bread and pasta, has more than doubled. Although this has had a significant impact in some countries, Canada has been relatively unaffected. In the first five months of 2008, according to Statistics Canada, food prices rose 1.0% in Canada, 4.5% in the United States (US), 6.8% in the European Union, and 21.2% in China. In the Canadian restaurant industry, prices for bread and cereal products have increased, but meat and fish prices have remained relatively stable, and the cost of fruits and vegetables has decreased. Because the overall cost of materials has increased at a much lower rate in Canada than in the US, Canadian restaurants have made only modest increases in menu prices, a fact which has contributed to the continued increase in total sales. According to the Organization for Economic Co-Operation and Development’s3 forecast, food prices will have peaked in 2008 and will gradually decrease over the next nine years. Strong global demand is expected to keep prices at higher than pre-2008 levels for wheat, chicken, and pork. Canadian per capita consumption of beef is expected to fall, resulting in lower beef prices.
RCFL Operations
Management Team (see Appendix 2 for a summarized organizational chart) Raymonde Plante is President and CEO of RCFL. She is an energetic 48-year-old with several years of experience in the hospitality industry. Born in Montreal and educated in the US (M.B.A., Harvard) and England (Ph.D., London School of Economics), she spent 11 years with EFL, beginning as a manager in its Expansion Department. Immediately prior to accepting the transfer to RCFL, she was Vice-President of Operations with responsibility for EFL’s steak house chain. The vice-president of the Roma division is Josh Belli, an Italian Canadian. He holds a degree in Hospitality Management and brings a wealth of practical experience to this position. President of YRK Ltd. prior to its acquisition and name change, he was retained on contract to assist Fortune with the transition and the rationalization of the original chain of outlets. Subsequently, Plante decided to place Belli in his current role.
3
OECD-FAO Agricultural Outlook 2008-2017 – OECD Publications, 2008 CMA Canada
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Jackie Browne is Vice-President, Corral Division. She holds an M.B.A. from Cambridge and performed extremely well in EFL’s management training program before moving quickly to a senior management position in the coffee shop division. Browne was transferred to RCFL in 2007 when the decision was made to open a steak house chain in North America. She was excited to come to Canada and have the opportunity to lead the proposed Corral division. After a 12-month trial period, Browne was confirmed in her current position. When Fortune was recalled to England in 2010, Prosad Singh was hired as VicePresident, Development. A civil engineer with an M.B.A. in marketing, he is responsible for expansion, advertising and promotion, as well as major repairs and maintenance. Singh has experience with several large companies in the hospitality industry and became available in 2010 when his employer, a large US restaurant company, decided to withdraw from the Eastern Canadian market. Constance (Connie) Buckner, M.B.A., CMA, is Vice-President, Head Office Operations. Previously in charge of the Canadian food services division of a well-known hotel chain, she was the first Canadian employee hired by Fortune in 2006. Buckner has fit in well at RCFL and has developed a reputation as an intelligent, personable, and hard-working manager. In 2010, she was promoted to her current position and was sent to London for two months to become familiar with EFL’s operations, be trained in best practices, and establish personal contacts within EFL’s corporate office. Ben Tang leads the information technology section and reports to Buckner. Tang has a degree in computer science and worked for a large computer software developer for five years before joining RCFL in 2008. Alicia King, B.A. (Economics), CMA, was hired as Controller in late 2009 to provide some additional financial expertise in the current difficult economic times and to assist with the transition to IFRS. King has been a CMA since 1998 and has a wide range of controllership experience in smaller companies. Board of Directors The chair of the board of directors is Anthony Pickens, a former President and CEO of EFL. When Pickens retired in 2006, he and his wife relocated to Toronto to be closer to family. He was elected to the board shortly after EFL acquired YRK Ltd. Mélanie Boucher was Canadian counsel for YRK Ltd. at the time of the acquisition. She impressed Fortune and his team with her knowledge of both the law and the restaurant business and accepted the offer to join the RCFL board in 2008. James Finney was the senior manager in charge of RCFL’s account at the Capital Bank of Canada. Recently retired, he is an outside director and sits on the audit committee. Beryl Sayad is the president of Sayad Advertising and a successful entrepreneur in her own right. She has a solid advertising background and is an accomplished systems analyst. She was elected to the board in 2009.
CMA Canada
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Practice Case Examination – M3A5
The other board members are Edgar Fortune, representing EFL, and RCFL executives Raymonde Plante and Connie Buckner. Restaurant Operations – General Most of the Roma and all of the Corral restaurants are located near, or within, suburban shopping areas in mid- to large-sized Canadian cities. Each of these restaurants has indoor table seating for between 150 and 200 diners and a segregated bar area with, at minimum, a few stools. Some of the restaurants have four or five tables in the bar area, and some Roma outlets have patio seating for between 50 and 60 diners. Most RCFL restaurants are served by public transportation and have sufficient no-charge parking nearby. All restaurants are handicapped accessible. RCFL restaurants are open six days per week for both lunch and dinner and on Sundays for dinner only. As is typical of full-service restaurants, RCFL outlets tend to be quiet on Mondays and become busier as the week progresses, with Sunday business being somewhat unpredictable. Each restaurant has a manager who is responsible for its operation. The manager’s duties include hiring, training, and evaluating staff (assistant managers, kitchen workers, bartenders, hosts/hostesses, and servers), ensuring sufficient inventory of operational supplies (food, alcoholic and other beverages, dishes, utensils, placemats/tablecloths, etc.), effecting day-to-day repairs and maintenance, and arranging for local advertising and promotion. Managers are also responsible for making daily bank deposits; on busy days, such as Friday and Saturday, more than one deposit may be made. Each restaurant is protected by a smoke detection and sprinkler system, and by a monitored, theft detection alarm system. Each restaurant is also equipped with a custom-made, time-delay safe located beneath the cash register in which employees can deposit cash as it accumulates during operations. Normally, only the manager and the assistant manager on duty know the combination of the lock. In addition, the timedelay mechanism makes it possible to prevent any opening of the safe until a specific time. Head office is responsible for implementing and maintaining information and accounting systems, developing the corporate-wide supply chain, providing training support as needed, processing payroll, building new outlets, evaluating manager and restaurant performance, facilitating major repairs or renovations, maintaining insurance, developing chain-wide advertising and promotions, conducting internal audits, arranging for external audits, and managing corporate banking. Head office is also responsible for setting menus and prices. It is a corporate principle to maintain consistency in food offerings and pricing within each chain and, with rare exceptions, the company is able to achieve this goal. Additional menu offerings may be developed for the short term under special circumstances in localized areas or by individual restaurants. Pricing is affected occasionally by unusual local conditions. For instance, the extraordinary economic boom in Fort McMurray, Alberta, resulted in the need to pay much higher wages than usual and, therefore, the need to charge higher prices.
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Both Roma and Corral outlets are considered busy restaurants. Most outlets operate at about 80% of their practical maximum capacity. Although this is considered good in the industry, some of EFL’s European chains achieve higher results. Each division is considered a profit centre and is responsible for maximizing division income. For purposes of evaluating the performance of the individual outlets in each chain, a benchmark is set at the average monthly sales per seat achieved by the restaurant with the highest annual sales in that division. Each outlet is expected to achieve at least 85% of this benchmark, as well as a target net profit margin set by head office each year. Information Systems RCFL uses specialized software adapted from that used by EFL. The sophisticated, menu-driven system connects ordering, pricing, and billing on the sales side and purchasing and costing on the supply side. The information terminals in each restaurant are connected directly to head office, which permits remote monitoring of all transactions. A variety of reports can be produced, and head office is quite pleased with the system. Tips added to customer invoices paid by debit or credit cards are transferred to a tip pool account in the information systems. Of a server’s total tips, 85% are credited to him/her individually; the balance is credited to a sub-pool that is divided among the outlet’s hosts/hostesses and bartenders. These tip amounts are distributed to the various staff members as part of the payroll process and are reflected in the amounts recorded on their T4 slips for the year. Cash tips are handled in a different manner. At the end of each shift, servers are expected to submit 15% of their cash tips for redistribution (referred to as tipping out). These tips are not recorded in the information systems of RCFL. Supply Chain Management Roma and Corral restaurants purchase most food ingredients, including fresh meat and produce, from World Food Suppliers Inc., a company with a reputation for obtaining and delivering food of good quality at reasonable prices from sources all over the world. Used by EFL and its other subsidiaries as well, this supplier is a favourite of large restaurant chains because it offers corporate-wide discounts based on annual volume. All desserts are purchased and delivered daily to Roma and Corral restaurants from local outlets of a large, Canadian bakery chain. EFL’s own brands of coffee are used at all RCFL restaurants. All other beverages, both alcoholic and non-alcoholic, are obtained from local sources since the high shipping cost associated with product weight would offset any volume discount that might be available from a single supplier. To date, all the Corral restaurants have been located close to Roma restaurants, and this is the plan for the foreseeable future. Because each Roma restaurant makes its own pasta and bread and has excess baking capacity, it was decided that the Roma restaurants would supply fresh bread products to the nearby Corral restaurants on a
CMA Canada
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Practice Case Examination – M3A5
daily basis. This eliminates the need to hire bakers and purchase special bread baking equipment for the Corral outlets. Compensation and Staffing At the divisional and corporate levels, senior managers are fairly compensated and receive bonuses based on division or corporate profitability, respectively. At the restaurant level, RCFL pays competitive wages for managers, assistant managers, and kitchen workers and slightly more than minimum wage for bartenders, servers, and hosts/hostesses. There must be at least two assistant managers at each location; more may be hired at the discretion of the restaurant manager. Annual management bonuses for each restaurant are based on achieving the target average monthly sales per seat (i.e. at least 85% of the benchmark) and the target net profit margin. Usually, 50% of the bonus pool calculated for a restaurant is paid to the manager, and the balance is allocated in equal parts to the assistant managers. However, the manager may choose to take a smaller bonus and either leave more for the assistant managers to share or specify to whom the extra portion should be paid. For instance, a manager may take only 40% of the bonus pool, identify an individual as Senior Assistant Manager, and direct the remaining 10% to that person. It is not difficult to hire staff for RCFL restaurants, but many of the better servers leave after a few years. This is puzzling to the managers because their restaurants are among the busiest in the industry, and servers’ tips tend to be higher at RCFL outlets than at most other restaurants. The quality of customer service is measured and monitored through customer questionnaires. Since hiring and training are responsibilities of individual restaurant managers, there tends to be some inconsistency in restaurant customer satisfaction ratings. Overall, RCFL’s service is rated above average but not excellent. Advertising and Promotion For company-wide promotion, RCFL purchases short, high-frequency television spots to advertise both restaurant chains. In those geographic areas in which Corral does not yet have a presence, the television advertisements focus only on the Roma chain. In addition, promotional flyers containing low-value coupons to be used at existing restaurants are distributed with local newspapers. To encourage all managers to welcome such coupons, head office credits each restaurant’s revenue with twice the dollar value of surrendered coupons when determining the management bonus pool, and the difference is charged to head office expense. Special saturation promotions are used for new restaurant openings. Normally, the program materials are distributed by mail in the targeted area. While the focus is to inform consumers that a new Roma or Corral restaurant is opening nearby, a significant discount program is offered to encourage people to actually come to the restaurant. RCFL also maintains a website that lists the outlets for each chain and features an automatic locator through which users can find the closest restaurant to their location by
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entering either a street address or a postal code. Telephone numbers for making reservations are provided, together with sample menus and pictures of the interior of representative restaurants. The site is updated when new restaurants are opened or other information in the database changes. Banking RCFL has used the Capital Bank of Canada (CBC) since EFL acquired the company, and they have built a good working relationship. CBC provides RCFL with 75% mortgage financing on each land and building purchase for a new restaurant, as well as a line of credit to a maximum of 50% of the total of accounts receivable and inventory. RCFL has received preferred client status from CBC. This means that the line of credit is offered at the prime rate, and the mortgages at 0.5% below the bank’s basic longterm mortgage interest rate. Accounting (see Appendix 3 for historical financial statements) Generally Accepted Accounting Principles – IFRS As a company listed on the TSX, RCFL must submit annual, audited financial statements. Being a subsidiary of a British company that reports under IFRS, RCFL decided to adopt IFRS effective July 1, 2009. On transition to IFRS, the following elections were made under IFRS 1 – First-time Adoption. a) Business combinations – The company elected under IFRS 1 to apply the IFRS standards related to Business Combinations (IFRS 3) effective July 1, 2009. This meant that the IFRS accounting treatment for business combinations would be applied prospectively from July 1, 2009, and onwards. b) Subsidiary elections – As the company’s transition date to IFRS is after its parent, EFL, the company elected under IFRS 1 to determine the carrying amounts on transition using the IFRS standards effective July 1, 2009, and not to use the carrying amounts previously included in the parent’s statements for consolidation purposes. c) Borrowing costs – The company elected under IFRS 1 to capitalize borrowing effective the date of transition, July 1, 2009. The result of the application of this standard resulted in adding an amount to buildings and reducing the interest expense by $2,990 for the year ended June 30, 2010. Deferred taxes were increased by $1,200 as a result of this adjustment. d) Revaluation method for land – On transition, RCFL adopted the policy to measure land using the revaluation approach. On adoption, at July 1, 2009, this resulted in an increase to the land value of $30,000 and an increase in deferred taxes of $12,000 which resulted in a net corresponding increase of $18,000 to the Revaluation Surplus. During 2010, a decline of $5,000 was recorded through other comprehensive income, net of deferred taxes of $2,000.
CMA Canada
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Accounts Receivable To attract repeat business and corporate clients, RCFL offers to set up a house account for its best customers. Head office manages these accounts, sending a monthly statement to each account holder with credit terms of 30 days from the statement date. As of June 30, 2011, RCFL has not incurred a bad debt expense on any house account. Credit card receipts that have not yet been processed and credited to RCFL’s bank account are also recorded in accounts receivable. Capital Assets RCFL owns all of its restaurant properties, furniture and equipment. Capital assets are recorded at cost, except for land which on transition to IFRS is reported using the revaluation model (as allowed under IAS 16). This model requires land to be adjusted to its fair value at each reporting period and any change in fair value to be reported in other comprehensive income (depending on whether it is a surplus or losses) for the period. (Deferred taxes are also required to be adjusted appropriately.) Buildings are amortized on a straight-line basis over 40 years, and furniture and equipment on a straight-line basis over 10 years. The capital cost allowance rates for tax purposes are 4% for buildings and 20% for furniture and equipment. In addition as required under Borrowing Costs IAS 23, interest costs incurred during the construction period for the buildings are capitalized to Buildings until the asset is complete and ready for use. Deferred Taxes RCFL has a deferred tax liability that is reported in Long-term Liabilities on the financial statements. These deferred tax liabilities result from the differences in the accounting treatment of capital assets and their tax treatment. Options on Land Purchases RCFL currently holds options on 12 parcels of land in locations that would be suitable for opening 7 Roma and 5 Corral outlets. Each option, which cost $50,000 at the end of 2009 (shown separately on the statement of financial position), gives RCFL the right to purchase the designated parcel of land for an additional $550,000 before January 1, 2012, at which time the options will lapse. These land options must be fair valued at each reporting period, and any changes in the fair value of these derivatives are immediately recognized into the profit or loss for the period.
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Appendix 1 RomaCorral Foods Ltd. Environmental Scan – December 2010 Strengths Experience and expertise of parent company and management Good reputation for quality food at reasonable prices Growth of brand Consistency in outlet appearance and menu pricing throughout Canada Good locations close to target markets Adequate parking and easy accessibility via public transit Reliable supply chain that delivers good-quality food Available baking capacity at Roma outlets to supply fresh bread to Corral outlets Preferred client status with bank Good base of long-term customers Weaknesses Inconsistencies in customer service among restaurants High turnover of the better servers High debt load Room for improvement in production volume (as a percentage of practical maximum capacity) Recent reduction in sales per outlet
• • • • • • • • • •
• • • • •
Opportunities • Increasing consumer spending in Canadian food service industry • Shifting demand from fine-dining restaurants to mid-level and fast-food restaurants • Expected decrease in some food prices (produce, beef, veal) over next nine years
• • • • •
Threats High competition in all food service markets High staff turnover in food service industry Economic downturn High price of wheat Decreasing consumption of beef per capita in Canada
CMA Canada
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Appendix 2 RomaCorral Foods Ltd. Organizational Chart As at June 30, 2011
Board of Directors Anthony Pickens – Chair Mélanie Boucher James Finney – Audit committee Beryl Sayad Edgar Fortune – EFL representative Raymonde Plante Connie Buckner
President and CEO Raymonde Plante
Vice-President, Head Office Operations Connie Buckner
Vice-President, Development Prosad Singh
Vice-President, Roma Division Josh Belli
Vice-President, Corral Division Jackie Browne
Controller Alicia King
Manager, Property Development
Restaurant Managers
Restaurant Managers
Information Technology Ben Tang
Manager, Marketing
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Appendix 3 RomaCorral Foods Ltd. Consolidated Statement of Financial Position As at June 30 (’000s)
Assets Current Assets: Cash Accounts receivable Inventory Land options Other Non-current Assets: Land Buildings Less: Accumulated depreciation Furniture and equipment Less: Accumulated depreciation $ 2011 IFRS 3,027 3,095 14,487 680 699 21,988 60,290 368,320 30,395 337,925 111,346 38,164 73,182 471,397 $493,385 $ 2010 IFRS 2,692 2,778 12,479 630 429 19,008 68,690 337,770 21,586 316,184 103,346 27,430 75,916 460,790 $479,798 2010 C-GAAP $ 2,692 2,778 12,479 630 429 19,008 43,690 334,780 21,586 313,194 103,346 27,430 75,916 432,800 $451,808 2009 C-GAAP $ 2,415 2,051 9,682 600 206 14,954 34,590 274,980 13,964 261,016 87,946 17,865 70,081 365,687 $380,641 2008 C-GAAP $ 1,663 1,543 7,533 – 674 11,413 26,140 216,480 7,821 208,659 73,116 9,812 63,304 298,103 $309,516
Total Assets Liabilities and Shareholders’ Equity Current Liabilities: Bank line of credit Accounts payable and accrued liabilities Current portion of long-term debt Due to parent Long-term Liabilities: Deferred taxes Mortgage payable (net of current portion) Total Liabilities Shareholders’ Equity: Common shares Preferred shares Revaluation surplus Retained earnings Total Liabilities and Shareholders’ Equity
$
2,100 19,662 8,562 4,000 34,324
$
1,600 19,379 6,904 21,000 48,883 12,712 258,616 320,211 70,000 10,000 15,000 64,587 159,587
$
1,600 19,379 6,904 21,000 48,883 1,512 258,616 309,011 70,000 10,000 – 62,797 142,797
$
1,700 15,710 6,045 22,000 45,455 700 213,845 260,000 70,000 10,000 – 40,641 120,641
$
900 11,778 4,711 19,000 36,389 500 169,678 206,567 70,000 10,000 – 22,949 102,949
9,182 274,579 318,085 70,000 10,000 7,800 87,500 175,300 $493,385
$479,798
$451,808
$380,641
$309,516
CMA Canada
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Practice Case Examination – M3A5
Appendix 3 (cont’d) RomaCorral Foods Ltd. Consolidated Statement of Comprehensive Income For the Years Ended June 30 (’000s)
2011 IFRS Sales Variable restaurant costs: Food and beverages Salaries, wages and benefits Other variable costs Contribution margin Expenses: Facilities (excluding amortization) Selling, advertising and promotion General and administration Interest Change in fair value of options Depreciation – buildings Depreciation – furniture and equipment $340,095 103,475 95,390 8,559 207,424 132,671 2010 IFRS $308,675 93,825 87,098 7,534 188,457 120,218 2010 C-GAAP $308,675 93,825 87,098 7,534 188,457 120,218 2009 C-GAAP $250,067 75,640 70,935 6,291 152,866 97,201 2008 C-GAAP $192,833 57,948 55,279 5,010 118,237 74,596
13,618 6,461 11,115 17,129 (50) 8,808 10,735 67,816 64,855 25,942 38,913 (7,200) $ 31,713
12,107 6,040 10,356 14,641 (30) 7,622 9,565 60,301 59,917 23,971 35,946 (3,000) $ 32,946
12,107 6,040 10,356 17,631 (30) 7,622 9,565 63,291 56,927 22,771 34,156 – $ 34,156
10,233 5,771 9,407 14,774 – 6,143 8,053 54,381 42,820 17,128 25,692 – $ 25,692
8,314 5,331 8,259 11,424 – 4,639 6,534 44,501 30,095 12,038 18,057 – $ 18,057
Income before taxes Income taxes (40%) Net income Other comprehensive income item Change in revaluation surplus net of tax Comprehensive Income Supplemental Schedule – Reconciliation of Retained Earnings Opening retained earnings Net income Dividends Closing Retained Earnings
$ 64,587 38,913 (16,000) $ 87,500
$ 40,641 35,946 (12,000) $ 64,587
$ 40,641 34,156 (12,000) $ 62,797
$22,949 25,692 (8,000) $40,641
$12,892 18,057 (8,000) $22,949
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CMA Canada 