06-03-2010, 02:28 PM
Case 05-6
Centcom Inc.
Centcom Inc., a telephone company, entered into an agreement to manage Britel, a telecommunications company based in Italy. Britel is a wholly-owned subsidiary of TTL Group LLC. The terms of the management agreement are as follows
⢠Centcom would manage Britel for a period of five years.
⢠Centcom would be entitled to receive a variable management fee that would allow Centcom to receive 80 percent of Britelâs EBTIDA during the agreement period. However, payment of the management fee is contingent on sufficient cash being generated from Britelâs operations.
⢠Centcom would select one member on the six-member board of directors and TTL Group would select the remaining five.
⢠Major expansion transactions (i.e., acquisitions, joint ventures, issuance of capital or debt, etc.) would require unanimous approval of the board.
⢠Centcom would manage the administrative and operational activities of Britel, including hiring and terminating employees.
o Centcom plans to integrate Britelâs activities into its own operations, through consolidating finance, accounting and customer services departments, by terminating the majority of Britelâs employees.
⢠Centcom would be able to provide additional services to Britelâs customers that Britel did not provide as of the date of the management agreement.
⢠In the event that Britelâs operations do not generate the required cash flow to satisfy Britelâs debt obligations, Centcom will be required to fund any shortfall. Such shortfalls are not reimbursable by Britel or TTL Group.
⢠TTL Group has no responsibility to fund Britelâs operations as a result of the agreement.
⢠TTL Group received a premium of â¬6 million for writing a call option to Centcom that, if exercised, would allow Centcom to purchase 100 percent of Britelâs outstanding common shares, as of the date of the agreement, at a strike price of â¬1 million. The option is exercisable at each anniversary date and expires five years from the date of the agreement.
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All Rights Reserved.
Case 05-6 Centcom, Inc. Page 2
Additional Information
⢠Britel is highly leveraged, and its balance sheet contains a deficit in shareholdersâ equity.
⢠Centcom estimates that under its management of Britel, economies of scale benefits will be realized, and, thus, will reduce Britelâs operating costs. Below is Britelâs summary Balance Sheet as of the date of the agreement.
Assets
(in Thousands)
Total current assets
⬠11,500
Fiber optic cable
70,500
Other assets
3,500
Total assets
⬠85,500
Liabilities
Provision and payables
⬠5,000
Deferred liabilities
10,500
Long-term debt
100,000
Total liabilities
â¬115,500
Total shareholdersâ deficit
⬠30,000
Assume for discussion purposes that Britel meets the definition of a business in Appendix A of IFRS 3.
Required
On the basis of your analysis of the factors presented in the case, determine whether Centcom, TTL Group, or neither party should consolidate Britel under International Financial Reporting Standards (IFRS). Be certain to discuss the relevant factors in the case that would support consolidation by either entity.
Copyright 2004 © Deloitte Development LLC
All Rights Reserved.
Case 09-8 Classified Information
Lads and Lassies (L&L), an SEC registrant, has its year end on the Saturday closest to January 31. Fiscal 2006, 2005, and 2004, which include 52 weeks each, ended on January 28, 2006, January 29, 2005, and January 31, 2004, respectively.
L&L manufactures and sells exclusive childrenâs clothing to the most discerning clientele. Its products offer high quality and modern style, including everything from a colorful collection of cashmere sweaters to perfect vintage washed tees. The products are sold through its boutiques, each of which resembles a New England seaside cottage.
The boutiques also include the Sassy Spa for Spoiled Pip-Squeaks (Sassy Spa), which was introduced in the third quarter of fiscal 2005. These spas for children offer hair and nail care, make-up application, massage services, and even etiquette classes.
L&L has the following information that needs to be analyzed to determine the appropriate income statement presentation.
1. Net Sales
L&L had net sales of $74.5 million in fiscal 2005 and $86.5 million in fiscal 2006; an increase of $12 million, or 16.1 percent. The increase in net sales was driven, in part, by an increase in revenue from services provided by Sassy Spa, which increased from $3.9 million in fiscal 2005 to $11.2 million in fiscal 2006. The remaining increase in total net sales of $4.7 million was because of an increase in the average transaction value, driven by higher average retail sales on a per unit basis due to the favorable customer response to the use of more vintage prints in its garments.
2. Gross Profit
Gross profit, which represents net sales less cost of sales, increased from $28 million in fiscal 2005 to $30.4 million in fiscal 2006; an increase of $2.4 million, or 8.6 percent.
Cost of sales includes expenses incurred to acquire and produce inventory for sale, such as product costs, freight-in and import costs, and direct labor costs for Sassy Spa employees. However, cost of sales excludes depreciation. Cost of sales increased from $46.5 million in fiscal 2005 to $56.1 million in fiscal 2006; an increase of $9.6 million, or 20.6 percent, primarily as the result of an increase in the cost of Sassy Spa services.
3. Gain on Sale of Corporate Headquarters
L&L relocated its corporate headquarters to Wilton, Connecticut. In connection with the relocation, L&L sold the abandoned building and realized a gain of $1.7 million on the sale.
Copyright 2009 Deloitte Development LLC
All Rights Reserved.
Case 09-8 Classified Information Page 2
4. Class Action Settlement
L&L became aware that the âvintageâ materials provided by one of its fabric suppliers were not, in fact, vintage. During fiscal 2006, L&L settled a class action lawsuit related to the legal case against the supplier in connection with this scandal and received proceeds of $2.7 million.
Required
⢠Determine the appropriate income statement presentation (sales, cost of sales, gross profit, operating income or expense, non-operating income or expense) for each item noted above. Note that L&L presents a subtotal for operating income on the income statement.
Copyright 2009 Deloitte Development LLC
All Rights Reserved.
Centcom Inc.
Centcom Inc., a telephone company, entered into an agreement to manage Britel, a telecommunications company based in Italy. Britel is a wholly-owned subsidiary of TTL Group LLC. The terms of the management agreement are as follows
⢠Centcom would manage Britel for a period of five years.
⢠Centcom would be entitled to receive a variable management fee that would allow Centcom to receive 80 percent of Britelâs EBTIDA during the agreement period. However, payment of the management fee is contingent on sufficient cash being generated from Britelâs operations.
⢠Centcom would select one member on the six-member board of directors and TTL Group would select the remaining five.
⢠Major expansion transactions (i.e., acquisitions, joint ventures, issuance of capital or debt, etc.) would require unanimous approval of the board.
⢠Centcom would manage the administrative and operational activities of Britel, including hiring and terminating employees.
o Centcom plans to integrate Britelâs activities into its own operations, through consolidating finance, accounting and customer services departments, by terminating the majority of Britelâs employees.
⢠Centcom would be able to provide additional services to Britelâs customers that Britel did not provide as of the date of the management agreement.
⢠In the event that Britelâs operations do not generate the required cash flow to satisfy Britelâs debt obligations, Centcom will be required to fund any shortfall. Such shortfalls are not reimbursable by Britel or TTL Group.
⢠TTL Group has no responsibility to fund Britelâs operations as a result of the agreement.
⢠TTL Group received a premium of â¬6 million for writing a call option to Centcom that, if exercised, would allow Centcom to purchase 100 percent of Britelâs outstanding common shares, as of the date of the agreement, at a strike price of â¬1 million. The option is exercisable at each anniversary date and expires five years from the date of the agreement.
Copyright 2004 © Deloitte Development LLC
All Rights Reserved.
Case 05-6 Centcom, Inc. Page 2
Additional Information
⢠Britel is highly leveraged, and its balance sheet contains a deficit in shareholdersâ equity.
⢠Centcom estimates that under its management of Britel, economies of scale benefits will be realized, and, thus, will reduce Britelâs operating costs. Below is Britelâs summary Balance Sheet as of the date of the agreement.
Assets
(in Thousands)
Total current assets
⬠11,500
Fiber optic cable
70,500
Other assets
3,500
Total assets
⬠85,500
Liabilities
Provision and payables
⬠5,000
Deferred liabilities
10,500
Long-term debt
100,000
Total liabilities
â¬115,500
Total shareholdersâ deficit
⬠30,000
Assume for discussion purposes that Britel meets the definition of a business in Appendix A of IFRS 3.
Required
On the basis of your analysis of the factors presented in the case, determine whether Centcom, TTL Group, or neither party should consolidate Britel under International Financial Reporting Standards (IFRS). Be certain to discuss the relevant factors in the case that would support consolidation by either entity.
Copyright 2004 © Deloitte Development LLC
All Rights Reserved.
Case 09-8 Classified Information
Lads and Lassies (L&L), an SEC registrant, has its year end on the Saturday closest to January 31. Fiscal 2006, 2005, and 2004, which include 52 weeks each, ended on January 28, 2006, January 29, 2005, and January 31, 2004, respectively.
L&L manufactures and sells exclusive childrenâs clothing to the most discerning clientele. Its products offer high quality and modern style, including everything from a colorful collection of cashmere sweaters to perfect vintage washed tees. The products are sold through its boutiques, each of which resembles a New England seaside cottage.
The boutiques also include the Sassy Spa for Spoiled Pip-Squeaks (Sassy Spa), which was introduced in the third quarter of fiscal 2005. These spas for children offer hair and nail care, make-up application, massage services, and even etiquette classes.
L&L has the following information that needs to be analyzed to determine the appropriate income statement presentation.
1. Net Sales
L&L had net sales of $74.5 million in fiscal 2005 and $86.5 million in fiscal 2006; an increase of $12 million, or 16.1 percent. The increase in net sales was driven, in part, by an increase in revenue from services provided by Sassy Spa, which increased from $3.9 million in fiscal 2005 to $11.2 million in fiscal 2006. The remaining increase in total net sales of $4.7 million was because of an increase in the average transaction value, driven by higher average retail sales on a per unit basis due to the favorable customer response to the use of more vintage prints in its garments.
2. Gross Profit
Gross profit, which represents net sales less cost of sales, increased from $28 million in fiscal 2005 to $30.4 million in fiscal 2006; an increase of $2.4 million, or 8.6 percent.
Cost of sales includes expenses incurred to acquire and produce inventory for sale, such as product costs, freight-in and import costs, and direct labor costs for Sassy Spa employees. However, cost of sales excludes depreciation. Cost of sales increased from $46.5 million in fiscal 2005 to $56.1 million in fiscal 2006; an increase of $9.6 million, or 20.6 percent, primarily as the result of an increase in the cost of Sassy Spa services.
3. Gain on Sale of Corporate Headquarters
L&L relocated its corporate headquarters to Wilton, Connecticut. In connection with the relocation, L&L sold the abandoned building and realized a gain of $1.7 million on the sale.
Copyright 2009 Deloitte Development LLC
All Rights Reserved.
Case 09-8 Classified Information Page 2
4. Class Action Settlement
L&L became aware that the âvintageâ materials provided by one of its fabric suppliers were not, in fact, vintage. During fiscal 2006, L&L settled a class action lawsuit related to the legal case against the supplier in connection with this scandal and received proceeds of $2.7 million.
Required
⢠Determine the appropriate income statement presentation (sales, cost of sales, gross profit, operating income or expense, non-operating income or expense) for each item noted above. Note that L&L presents a subtotal for operating income on the income statement.
Copyright 2009 Deloitte Development LLC
All Rights Reserved.