Financial Accounting

Project

Topic: Analysis of financial statements of three coffee chains

Starbucks (USA), Nestle (Europe) & CCD(India)

Submitted By: Group 3 Submitted To:

Ankit Patel (MBA19061) Prof. Manoj Kumar
Chandrasekhar Sinha (MBA19066) (IIM Jammu)
Mohit Arya (MBA19084)
Sameer Sanadi (MBA19093)
Sudhanshu Vaidik (MBA19099)
 Content
1. Introduction…………………………………………………3
2. Starbucks…………………………………………………….4-7
3. Nestle………………………………………………………...8-9
4. Café Coffee Day……………………………………………..10-11
5. Comparison of the different Parameters……………………..12-13
 Introduction

This project aims at studying the revenue recognition, inventory, assets and credit loss policies
of three coffee chains; Starbucks, Café Coffee Day and Nestle, and comparing them later.
Starbucks corporation is an American coffee company and coffeehouse chain. Starbucks was
founded in Seattle, Washington in 1971. As of early 2019, the company operates over 30,000
locations worldwide.
Café Coffee Day (CCD) is an Indian Café chain. It is a subsidiary of Coffee Day Enterprises
Limited. Coffee day serves 1.8 billion cups of coffee annually in six countries. It was founded
in 1993.
Nestle S. A. is a Swiss multinational food and drink processing conglomerate corporation
headquartered in Vevey, Vaud, Switzerland. It is the largest food company in the world,
measured by revenue and other metrics, since 2014. It was founded in 1866.
 Starbucks (USA)

Financial Standards - Its policies and procedures are designed to comply with all applicable
laws, accounting and reporting requirements, tax rules and other regulations and requirements,
including those imposed by the SEC, Nasdaq, and foreign countries.
For Preparing financial statements in conformity with accounting principles generally
accepted in the United States of America (“GAAP”) requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses.

Revenue Recognition
• Company-operated Store Revenues: Revenues are recognized when payment is
tendered at the point of sale.
• Licensed Store Revenues:
- The revenues consist of product and equipment sales to licensees, as well as
royalties and other fees paid by licensees.
- Sales of coffee, tea, food and related products are generally recognized upon
shipment to licensees, depending on contract terms.
- Shipping charges billed to licensees are also recognized as revenue, and the
related shipping costs are included in cost of sales including occupancy costs
on our consolidated statements of earnings.
- Royalty revenues based upon a percentage of reported sales, and other
continuing fees, such as marketing and service fees, are recognized on a
monthly basis when earned.
• Other Revenues:
- It primarily includes sales of packaged coffee, tea and a variety of ready-to-
drink beverages and single-serve coffee and tea products to customers
outside of the company-operated and licensed stores.
- Sales of coffee, tea, ready-to-drink beverages and related products to
grocery, warehouse club stores and foodservice accounts were generally
recognized when received by the customer or distributor, depending on
contract terms.
- Revenues from sales of products to manufacturers that produce, market and
sell Starbucks’s products through licensing agreements are generally
recognized when the product is received by the manufacturer or distributor.
License fee revenues from manufacturers are based on a percentage of sales
and are recognized on a monthly basis when earned.
- other revenues will also include product sales to and licensing revenue from
authorized channels like Nestlé. Product sales to Nestlé are generally
recognized when the product is shipped, whereas license and royalty
revenues are based on a percentage of sales and are recognized on a monthly
basis when earned.
• Stored Value Cards:
- Stored value cards, primarily Starbucks Cards, can be activated at the
company-operated and most licensed store locations, online at
Starbucks.com or via mobile devices held by its customers, and at certain
other third-party locations, such as grocery stores, although they cannot be
reloaded at these third-party locations.
- When an amount is loaded onto a stored value card at any of these locations,
the company recognize a corresponding liability for the full amount loaded
onto the card, which is recorded within stored value card liability on its
consolidated balance sheets.
- When a stored value card is redeemed at a company-operated store, the
company recognize revenue by reducing the stored value card liability.
- Whereas when a stored value card is redeemed at a licensed store location,
the company reduce the corresponding stored value card liability and cash,
which is reimbursed to the licensee.
- certain cards may be deemed to be remote due to long periods of inactivity.
In these circumstances, if management also determines there is no
requirement for remitting balances to government agencies under unclaimed
property laws, unredeemed card balances may then be recognized as
breakage income, which is included in interest income and other, net on their
consolidated statements of earnings.
• Loyalty Program:
- Customers in the U.S., Canada, and certain other countries who register their
Starbucks Card are automatically enrolled in the Loyalty Program. They earn
loyalty points (“Stars”) with each purchase at participating Starbucks stores,
as well as on certain packaged coffee products purchased in selected
Starbucks stores, through CPG channels, and when making purchases with
the Starbucks branded credit and debit cards.
- Deferred revenue associated with the estimated selling price of Stars earned
by its program members towards free product as each Star is earned, and a
corresponding liability is established within stored value card liability on
their consolidated balance sheets. The estimated selling price of each Star
earned is based on the estimated value of the product for which the reward is
expected to be redeemed, net of Stars the company do not expect to be
redeemed, based on historical redemption patterns. Stars generally expire if
inactive for a period of six months.
- When a customer redeems an earned reward, the company recognize revenue
for the redeemed product and reduce the related loyalty program liability.
Inventories
- Inventories are stated at the lower of cost (primarily moving average cost) or
net realizable value. We record inventory reserves for obsolete and slow-
moving inventory and for estimated shrinkage between physical inventory
counts.
- An inventory reserve is an asset contra account in which a company retains
an estimated charge for inventory that it has not yet specifically identified,
but which it expects is present and for which it must write down the value
to some amount less than the cost at which it is currently recorded. There
may be a variety of causes for such a write down, such as
the obsolescence, spoilage, or theft of inventory.
- Inventory reserves are based on inventory obsolescence trends, historical
experience and application of the specific identification method. As of
September 30, 2018, and October 1, 2017, inventory reserves were $41.5
million and $38.4 million, respectively.

Credit Losses
- The company receivables are mainly comprised of receivables for product
and equipment sales to and royalties from our licensees, as well as
receivables from our CPG customers. Our allowance for doubtful accounts
is calculated based on historical experience, customer credit risk and
application of the specific identification method. As of September 30, 2018,
and October 1, 2017, the allowance for doubtful accounts was $8.0 million
and $9.8 million, respectively.

Fixed Assets
- Property, plant and equipment, which includes assets under capital leases,
are carried at cost less accumulated depreciation.
- Cost includes all direct costs necessary to acquire and prepare assets for use,
including internal labour and overhead in some cases.
- Depreciation is computed using the straight-line method over estimated
useful lives of the assets, generally ranging from 2 to 15 years for equipment
and 30 to 40 years for buildings.
- Leasehold improvements are amortized over the shorter of their estimated
useful lives or the related lease life, generally 10 years. For leases with
renewal periods at their option, they generally use the original lease term,
excluding renewal option periods, to determine estimated useful lives.
- The costs of repairs and maintenance are expensed when incurred, while
expenditures for refurbishments and improvements that significantly add to
the productive capacity or extend the useful life of an asset are capitalized.
- When assets are disposed of, whether through retirement or sale, the net gain
or loss is recognized in net earnings. Long-lived assets to be disposed of are
reported at the lower of their carrying amount or fair value less estimated
costs to sell.
- They evaluate property, plant and equipment for impairment when facts and
circumstances indicate that the carrying values of such assets may not be
recoverable.
- When evaluating for impairment, they first compare the carrying value of the
asset to the asset’s estimated future undiscounted cash flows. If the estimated
undiscounted future cash flows are less than the carrying value of the asset,
then they determine if they have an impairment loss by comparing the
carrying value of the asset to the asset's estimated fair value and recognize
an impairment charge when the asset’s carrying value exceeds its estimated
fair value.
- The fair value of the asset is estimated using a discounted cash flow model
based on forecasted future revenues and operating costs, using internal
projections.
 Nestle (Europe)
Financial Standards - The Consolidated Financial Statements comply with
International Financial Reporting Standards (IFRS) issued by the International
Accounting Standards Board (IASB) and with Swiss law.
They have been prepared on a historical cost basis, unless stated otherwise. All significant
consolidated companies, joint arrangements and associates have a December 31
accounting year-end.

Revenue Recognition
- Sales are recognized when control of the goods has transferred to the customer,
which is mainly upon arrival at the customer.
- Revenue is measured as the amount of consideration which the Group expects to
receive, based on the list price applicable to a given distribution channel after
deduction of returns, sales taxes, pricing allowances, other trade discounts and
couponing and price promotions to consumers.
- Other revenue is primarily sales-based royalties and license fees from third
parties which have been earned during the period.

Inventories
- Raw materials and purchased finished goods are valued at the lower of purchase
cost calculated using the FIFO (first-in, first-out) method and net realizable value.
- Work in progress, sundry supplies and manufactured finished goods are valued at
the lower of their weighted average cost and net realizable value.
- The cost of inventories includes the gains/losses on cash flow hedges for the
purchase of raw materials and finished goods.

Credit Losses
- The Group applies the IFRS 9 simplified approach to measuring expected credit
losses (ECLs) for trade receivables at an amount equal to lifetime ECLs.
- The ECLs on trade receivables are calculated based on actual credit loss experience
over the preceding three to five years on the total balance of non-credit impaired
trade receivables.
- The Group considers a trade receivable to be credit impaired when one or more
detrimental events have occurred such as:
(a) significant financial difficulty of the customer; or
(b) it is becoming probable that the customer will enter bankruptcy or other
financial reorganization.
 - Impairment losses related to trade and other receivables are not presented
separately in the consolidated income statement but are reported under the
heading Marketing and administration expenses.

Fixed Assets
- Owned property, plant and equipment are shown on the balance sheet at their
historical cost.
- Depreciation is assessed on components that have homogenous useful lives by
using the straight-line method so as to depreciate the initial cost down to the residual
value over the estimated useful lives.
- The residual values are 30% on head offices and nil for all other asset types. The
useful lives are as follows:
Buildings 20-40 Years
Machinery and equipment 10-25 Years
Tools, furniture, information technology and sundry equipment 3-15 Years
Vehicles 3-10 Years
Land is not depreciated.
- Reviews of the carrying amount of the Group’s property, plant and equipment are
performed when there is an indication of impairment.
- In assessing value in use, the estimated future cash flows are discounted to their
present value, based on the time value of money and the risks specific to the
country where the assets are located. The risks specific to the asset are included
in the determination of the cash flows.
- Impairment of property, plant and equipment arises mainly from the plans to
optimize industrial manufacturing capacities by closing or selling inefficient
production facilities.
 Café Coffee Day (India)
Financial Standards - The Company have audited the accompanying standalone Ind AS
financial statements of Coffee Day Enterprises Limited (‘the Company’), which comprise the
balance sheet as at 31 March 2018, the statement of profit and loss, the statement of changes in
equity and the statement of cash flows for the year then ended, and summary of significant
accounting policies and other explanatory information (herein after referred to as “Standalone
Ind AS financial statements”).

Revenue Recognition
- The Company derives its revenue primarily from running and/or managing hotels
and resorts, sale of coffee beans and providing consultancy services.
- Revenue from sale of coffee beans is recognized on transfer of all significant risk
and rewards of ownership to the buyer.
- Service income is recognized when the related services are rendered unless
significant future contingencies exist.
- Revenue is measured at the fair value of the consideration received or receivable,
taking into account contractually defined terms of payment, inclusive of excise duty
and net of taxes or duties collected on behalf of the government.
- For Customer Loyalty Programs, the fair value of the consideration received or
receivable in respect of the initial sale is allocated between the award credits and
the other components of the sale. The amount allocated to award credits is deferred
and is recognized as revenue when the award credits are redeemed and the Group
has fulfilled its obligations to supply the discounted products under the terms of the
Programs or when it is no longer probable that the award credits will be redeemed.

Inventories
- Inventories are valued at the lower of cost and net realizable value. ‘Cost’ comprises
purchase cost and all expenses incurred in bringing the inventory to its present
location and condition.
- Raw Materials — FIFO landed cost

- The comparison of cost and net realizable value is made on an item by item basis.
The Company periodically assesses the inventory for obsolescence and slow-
moving stocks.

Credit Losses
- Credit losses are measured as the present value of all cash shortfalls (i.e. the
difference between the cash flows due to the Company in accordance with the
contract and the cash flows that the Company expects to receive).
- The Company considers a financial asset to be in default when:
(a) The borrower is unlikely to pay its credit obligations to the Company in full,
without recourse by the Company to actions such as realizing security.
 (b) The financial asset is 90 days or more past due.
(c) it is probable that the borrower will enter bankruptcy or other financial
reorganization; or
(d) the disappearance of an active market for a security because of financial
difficulties.
- Presentation of allowance for expected credit losses in the balance sheet. Loss
allowances for financial assets measured at amortized cost are deducted from the
gross carrying amount of the assets.
- The gross carrying amount of a financial asset is written off (either partially or in
full) to the extent that there is no realistic prospect of recovery. This is generally the
case when the Company determines that the debtor does not have assets or sources
of income that could generate sufficient cash flows to repay the amounts subject to
the write-off.

Fixed Assets
- Cost of an item of property, plant and equipment comprises any directly attributable
cost of bringing the item to its working condition for its intended use and estimated
costs of dismantling and removing the item and restoring the site on which it is
located. Like purchase price, import duties, non-refundable purchase taxes etc. after
deducting trade discounts and rebates.

- All items of property, plant and equipment are stated at historical cost less
depreciation.

- If significant parts of an item of property, plant and equipment have different useful
lives, then they are accounted for as separate items of property, plant and equipment.
- Depreciation is provided on a Straight-Line Method (‘SLM’) over estimated
useful life of the fixed assets estimated by the Management.
- The Company estimates the useful lives for fixed assets as follows:

• Plant and machinery 8 Years

• Office equipment 6 Years

• Furniture and fixtures 8 Years

• Vehicle 6 Years

- The building built on leasehold land is classified as building and amortized over the
lease term (i.e. 22 years) or the useful life of the building (i.e. 20 years), whichever
is lower.
 Comparison of different Parameters

Companies/ Cafe Coffee Starbucks Nestle

Day
Policies
A) Sales - at transfer of A) Company store - A) Sales - Arrival to the
Revenue risk and ownership to payment is tendered at customer
the buyer point of sale
B) Licences and Royalties -
B) Services- rendered B) Licensed store - at earned in period bases
shipment with shipping
charges received

Royalties - monthly basis

C)Sales - received by the

costumer

A)raw materials - Fifo A)Inventories - moving A)Raw materials - Fifo and

Inventory average cost net realisable value
B)inventories- lower of
cost and net realisable B)Work in progress and
value finished goods - WAC and
net realisable value

A)Property,Plant,Equipmen A)Property,Plant,Equipmen A)Property,Plant,Equipmen

Fixed assets t - historical cost t - cost less accumulated t - historical cost
depreciation

A)SLM method - for fixed A)SLM method- for fixed A)SLM method- for all
Depreciation asset to the life time asset to its life time having homogenous useful
estimated by management life

A)Allowance for credit loss- A)Allowance for doubtful A)Trade receivable(ECl) -

Credit losses amortised cost is deducted accounts - historical IFRS9 Simplified approach -
from total assets experience, customer using 3 to 5 year data
credit risk
B)Credit impaired -
1)financial difficulty

2)bankruptcy
Analysis:
Fixed assets - Cafe coffee day and Nestle are both mentioning PPE historical cost in balance
sheet and depreciation expenses in income statement. But Starbucks PPE is mentioning cost
less depreciation in balance sheet and depreciation expenses in income statement.
a) Which indicates Cafe coffee day and Nestle are not mentioning accumulated depreciation
in balance sheet and showing higher value of asset.
Depreciation - All companies are following the SLM model and completely writing off the
asset value. And being conservative in writing depreciation.

Fixed asset life (years)

Company CCD Starbucks Nestle
Building 20 30-40 20-40
PPE 8 2-15 10-25
Vehicle 6 — 3-10

CCD is comparatively more conservative in estimating the Fixed Asset life and fully
depreciating asset fast.
Revenue recognition: All companies are conservative in recognising the revenue. They are
doing this at the point of rendering product to the customer.
Inventory - CCD is following lower of cost and net realisable value, which is estimating the
value at what an inventory could be sold and subtracting the expenses, which is estimated
through forecasting the value of the product.
Starbucks is following moving average cost which can be manipulated by the number of
years or months it uses to value the inventory.
Nestle is following the FIFO method which is normal and straight forward.