Introduction
McDonald’s corporation is undoubtedly the largest chain of hamburger fast-food restaurants in the world. The restaurant serves more than 58 million customers every day. The operation of Mcdonald’s is like a typical large chain that operates as a corporation, a franchise, or at times as an affiliate. It draws its revenues from various sources such as franchise fees, rent from its various property across the world and most sales from its company-operated restaurants. In the last three years, significant growth has been evident with the company registering a 27% growth.
Burger King on the other hand or popularly known as BK is the leading competitor with a huge global chain of hamburger fast-food restaurants. The parent company of Burger King is Burger King Holdings. At the closing of this fiscal year, it had 12,200 outlets that are spread across seventy-three countries with 66% being in the United States and most of them are privately controlled and owned. The company serves roughly 11.4 million customers on a daily basis, and with a workforce of 38,800 employees.
Analysis
The analysis will focus on evaluating the type of intangible assets the two companies have and determining if they are finite or infinite. Another evaluation will be on the impairment of intangible assets in both companies and the effects of the impairment in both.
Intangible Assets
These are assets that are not visible, they are not actually gauged, and they can’t be touched they are non-monetary assets. Intangible assets include competitive intangibles which entail structural, associational and influential activities. The other type is legal intangibles that consist of trademarks, patents, trade secrets like lists of customers, and finally copyrights.
The legal intangible spawns legal property which can be defended in a court of law. The competitive intangibles are not legally owned but they have a direct impact on things like productivity, wastage, opportunity cost, and effectiveness of the organization. The basic competitive intangible is human capital. In this study, emphasis will be on two parts: trademark, copyrights, and licenses which are legally intangible. The second will be on franchises that are competitive intangible.
Trademarks, Copyrights and Licenses
These intangible assets give the owner an exclusive right to offer a particular service or to produce certain goods. For this reason, their value is obtained from the cash flows that a generated from the exclusive right. For both companies Burger King and Mc Donald’s, they get a lot of income from their well-established trademarks and copyrights. These intangible assets have an infinite life because they are the only form of authenticity, and the value comes from extra returns that are associated with possessing this right.
Franchises
This is a situation where an owner is given the right to offer a particular service or sell a product of a brand-name company i.e. the franchisor. The person who gets the right is the franchisee. For both McDonald’s and Burger King, there are thousands of such franchises globally. The people i.e. the franchisees, who buy these franchises, usually pay upfront or in some instances annually to Mc Donald’s or Burger King i.e. the franchisor for operating the business.
The franchisees then get the privilege to use the brand name, benefit from advertising since advertising is aimed at marketing all branches regardless of whether they are franchises or not. They also get corporate support. They serve a given territory and run for a given time frame. Thus in this intangible asset, there is a finite life that is determined by the given period of the franchise.
Impairment
In both companies, goodwill has been the only intangible asset that has been impaired in the last two years. Goodwill is supposed to be consigned to a company’s accounting units which are anticipated to derive benefits from that particular goodwill. The goodwill is normally tested to find out if the fair value is less than the recorded goodwill value. If the recorded value is greater than the fair value then there is impairment and it must be charged off. These impairments caused similar effects in both companies since they are in the same food processing industry.
The major effect that was indicated in the two companies was in stock prices. After an impairment charge in 2008, the price of McDonald’s share dropped by 10 dollars it was trading at $55 before the charge and the next day of trading, a share was going for $45. The company’s share price dropped significantly below the book value of impairment which made investors be skeptical of the stock. This affected the capital structure to some extent thus affecting the income statement
In Burger King, it happened in 2009 and had worse consequences because not only did its share price fall, but the overall income in that financial year dropped significantly as it made customers create a perception that Burger King is overrated. The share price dropped by $6 dollars and the company also posted a decrease in total revenue of almost half a million dollars. Thus the goodwill impairment greatly affected the company’s income statement.
Conclusion
According to the study, it has been noted that intangible assets are becoming increasingly relevant in all companies, and in some, they are proving to be even more profitable than tangible assets. It is important for a company to review its goodwill impairment regularly or at least periodically so as to determine the goodwill’s fair value.