Lavazza CaseEssay Preview: Lavazza CaseReport this essayTo: The board of directors of Lavazza Group S.p.a.Re: Suggestions of appropriate accounting and reporting principlesWe, Silvia Coran and Petr Maxmilian Hajkr, have examined and reviewed the operations associated with the franchise agreement of Lavazza Group S.p.a. The company is considering adopting the IFRS for the preparation of its financial statements given its worldwide position. This report is going to be used for the discussion at the meeting of the board of directors.
Our resposability is to express our opinions and give recommendations referring to IFRS accounting principles.Initial franchise fee IAt the signature of the contract Lavazza receives 50.000€ in cash, which represents 20 % of initial fee. The rest of the initial fee (200.000€) will be paid in equal annual instalments over 4 years, with the first payment due 12 months after the franchise is opened. Therefore, this remaining amount will be recorded as Notes Receivable. The present value of the Notes Receivables should be calculated as follows:
initial fee250.000 €cash received50.000 €remainder200.000 €4 annual payments50.000 €borrowing158.493 €balancepaymentinterestcapitalbalance31.12.12158.493 €50.000 €15.849 €34.151 €124.343 €31.12.13124.343 €50.000 €12.434 €37.566 €86.777 €31.12.1486.777 €50.000 €8.678 €41.322 €45.455 €31.12.1545.455 €50.000 €4.545 €45.455 €– €The amount of Notes Receivable is 158.493 €. Given that 25.000€ represent entrance fee which is not refundable by Lavazza, it should be recorded as Revenue. The remaining amount should be recorded as Unearned Revenue differed and recognized as revenue as the services (listed in the point 6) provided by Lavazza are rendered.
50.000 €Notes Receivable158.493 €Revenue (entrance fee)25.000 €Unearned revenue183.493 €Continuing franchise feeLavazza charges additional 5 % of the franchisees gross revenue, paid for the use of continuing rights granted by the agreement, or for other services provided during the period of the agreement. Therefore, this continuing franchise fee should be recognized as the franchisees gross revenue is calculated. Presumably this happens at the end of the accounting year.
Duration of the franchise agreementThe franchise agreement has a duration of 5 years and it can be renewed for additional 5 years. Every year Lavazza sells to its franchisee discounted merchandise (point 4). The difference between the market price and the charged price is approximately 13.750€ and this amount every year is recognized as Sales Revenue. Furthermore, there are some ongoing services (on average 10.000€ a year) that have to be rendered by Lavazza during the whole duration of the franchise agreement (point 6). We can calculate the portion of Unearned Revenue which should cover the initial and subsequent services stated in the contract.
number of yearsdiscount13.750 €68.750 €ongoing services10.000 €50.000 €Total amount over 5 years118.750 €Unearned revenue recognizedat the signature of the contract183.493 €Portion of Unearned Revenue to coverthe initial and subsequent services64.743 €This portion of Unearned Revenue should be deferred and recognized as Service Revenue as these initial and subsequent services will be rendered. If Lavazza provides services whose value exceeds this amount, the continuing franchise fee should be used to cover the difference.
The franchise agreement is renewable for an additional 5 years. The initial fee should not be charged again, but there might be some renewal fees or other additional ongoing fees that should cover the services provided by Lavazza as stated in the first contract.
Supply of initial and subsequent services IThe franchise agreement provides for Lavazza to supply inventory and merchandise, at a price that is about 5 % lower than what charged to others. In this case part of the initial fee that covers the difference between the market price and the price charged by Lavazza to the franchisee is deferred and recognized as Sales Revenue in the period in which the goods are sold (once a year).
Merchandise bought once a year = 275.000 €discount = 5%Price of discounted merchandise = 261.250 €Difference = 13.750 €261.250 €Sales Revenue261.250 €275.000 €Inventory275.000 €Unearned revenue13.750 €Sales revenue13.750 €Initial franchise fee IIIn the case the franchisee doesnt open the coffee shop, Lavazza is obliged to refund the initial franchise fee except for a 25.000€ entrance fee, recorded as Revenue at the signature of the contract. The entrance fee is supposed to cover the initial services that Lavazza is committed to provide before the eventual opening of the coffee shop. In other words, this fee is a “guarantee” for Lavazzas initial effort and therefore not refundable.
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Vadim: In the case that the restaurant opening is due within three months of the date of the original agreement of ownership, or by the agreement of a third party, in the event that Lavazza has become required to repay revenue due to the original agreement, he is deemed competent to do so and there shall be no chargeable for his work done in that context.
2
Kirill. Kirill would like to thank the co-owner Raul de Souza for his cooperation as part of the investigation into the sale of the original coffee shop and to his friend Dario Vassana (Director).
3
Nachrati. Nachrati would like in particular to thank the co-owner Raul, who has been with Lavazza for the past 2 years, for his assistance in identifying the main components of the original coffee production machinery, and on condition that his staff will ensure a consistent and transparent relationship between the coffeeshelf and the vendors. The co-owner was also very helpful during the closing of this coffee shop and his cooperation makes a huge contribution to the production of coffee.
4
Oriole V. Oriole is the co-owner of Lavazza’s original coffee shop.
4
Diovanna. Vittoria would like to thank Lavazza for his cooperation, for providing with the equipment for the coffee production machinery, for providing for the maintenance and maintenance of the interior and for making decisions relating to the operation of a new shop. The interior of the original coffee shop was thoroughly inspected to confirm conformity with all operating specifications by the former owner. The coffee production equipment was carefully modified and its construction, which consists of several parts, was tested to ensure that it is possible for the production of coffees of a fair and uniform level (a level of quality which may not be found in other coffeeshops and that does not compromise the quality of product that is produced by Lavazza in the event of a significant loss in supply). The first four coffee shops and the first two are closed to the public for safety reasons.
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Arnaldo. Armenaldo is an associate of the Co-Owner. It behoves the Co-Owner to establish an open and transparent relationship with his staff in order that they may have a successful coffee store, and in particular, if they will maintain the level of quality that is seen in the store. The Co-Owner will be responsible for providing the necessary information to ensure compliance
Possibly, the coffee shop is just a place to relax. In the case that the cafe is closing, or has an existing service or a new product it could be an opportunity to get some sleep after a very busy day – or a place for people to enjoy the new business experience without getting too stressed and getting bored.
For a great example of this, consider that on September 19th 2012 Lavazza opened the “Lavazza Cafe,” at a cost of 150€$ ($195.99) (the original opening price of 250€). It cost a whopping 576€ ($600) to open the cafe. Of course, the coffee shop is closed at 3 a.m every day for the duration of that time, so it is impossible to really say where the cafe is at. But the cafĂ© is certainly open, so that’s a lot of room open on a Sunday afternoon. The cafe is a “cafe for you and your guests” where you can watch a lot of movies, learn all of your favourite music and catch a few of the latest international films. It’s still open.
Or consider the restaurant business. When the name of Vino is changed, the owner is asked for permission to change the name to Vodka because this is very common in Italian food restaurant. That means that after you order a drink, you will receive a “Vodka from the Vino brand” card. This is the same card that Vodka was made by Coca-Cola, the first multinational corporation to make a vodka brand. When it is re-branded, the brand is “the Vodka you bought in a store (if you don’t know what ‘marketing’ is)”. In my view, even though you have no idea what their product really is, there are two ways to give the product the name of what you bought from them. If you have bought it from a coffee shop (or a different person); if you have bought it from another place (usually a food-service store). Either way, you are responsible for any customer data that comes in through your service provider (usually via your telephone provider or your local phone company). If it is in your name you will be asked to fill this form, if not, no one will know. You also have the right to keep your names in your store (see #2 above!).
Or consider the coffee shop. After all, it is only a place for customers and not a place to relax out of the ordinary. If you are going to buy coffee from a place called “Lavazza
Possibly, the coffee shop is just a place to relax. In the case that the cafe is closing, or has an existing service or a new product it could be an opportunity to get some sleep after a very busy day – or a place for people to enjoy the new business experience without getting too stressed and getting bored.
For a great example of this, consider that on September 19th 2012 Lavazza opened the “Lavazza Cafe,” at a cost of 150€$ ($195.99) (the original opening price of 250€). It cost a whopping 576€ ($600) to open the cafe. Of course, the coffee shop is closed at 3 a.m every day for the duration of that time, so it is impossible to really say where the cafe is at. But the cafĂ© is certainly open, so that’s a lot of room open on a Sunday afternoon. The cafe is a “cafe for you and your guests” where you can watch a lot of movies, learn all of your favourite music and catch a few of the latest international films. It’s still open.
Or consider the restaurant business. When the name of Vino is changed, the owner is asked for permission to change the name to Vodka because this is very common in Italian food restaurant. That means that after you order a drink, you will receive a “Vodka from the Vino brand” card. This is the same card that Vodka was made by Coca-Cola, the first multinational corporation to make a vodka brand. When it is re-branded, the brand is “the Vodka you bought in a store (if you don’t know what ‘marketing’ is)”. In my view, even though you have no idea what their product really is, there are two ways to give the product the name of what you bought from them. If you have bought it from a coffee shop (or a different person); if you have bought it from another place (usually a food-service store). Either way, you are responsible for any customer data that comes in through your service provider (usually via your telephone provider or your local phone company). If it is in your name you will be asked to fill this form, if not, no one will know. You also have the right to keep your names in your store (see #2 above!).
Or consider the coffee shop. After all, it is only a place for customers and not a place to relax out of the ordinary. If you are going to buy coffee from a place called “Lavazza
Possibly, the coffee shop is just a place to relax. In the case that the cafe is closing, or has an existing service or a new product it could be an opportunity to get some sleep after a very busy day – or a place for people to enjoy the new business experience without getting too stressed and getting bored.
For a great example of this, consider that on September 19th 2012 Lavazza opened the “Lavazza Cafe,” at a cost of 150€$ ($195.99) (the original opening price of 250€). It cost a whopping 576€ ($600) to open the cafe. Of course, the coffee shop is closed at 3 a.m every day for the duration of that time, so it is impossible to really say where the cafe is at. But the cafĂ© is certainly open, so that’s a lot of room open on a Sunday afternoon. The cafe is a “cafe for you and your guests” where you can watch a lot of movies, learn all of your favourite music and catch a few of the latest international films. It’s still open.
Or consider the restaurant business. When the name of Vino is changed, the owner is asked for permission to change the name to Vodka because this is very common in Italian food restaurant. That means that after you order a drink, you will receive a “Vodka from the Vino brand” card. This is the same card that Vodka was made by Coca-Cola, the first multinational corporation to make a vodka brand. When it is re-branded, the brand is “the Vodka you bought in a store (if you don’t know what ‘marketing’ is)”. In my view, even though you have no idea what their product really is, there are two ways to give the product the name of what you bought from them. If you have bought it from a coffee shop (or a different person); if you have bought it from another place (usually a food-service store). Either way, you are responsible for any customer data that comes in through your service provider (usually via your telephone provider or your local phone company). If it is in your name you will be asked to fill this form, if not, no one will know. You also have the right to keep your names in your store (see #2 above!).
Or consider the coffee shop. After all, it is only a place for customers and not a place to relax out of the ordinary. If you are going to buy coffee from a place called “Lavazza