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McDonalds SEC-10K, Research Paper Example

Pages: 4

Words: 1189

Research Paper

This paper is based on McDonald’s SEC-10K annual report. The core focus of the paper is on the financial statements of McDonald’s as a whole and also to explain the concepts learnt in class. The paper will describe the geographical segmentation, foreign currency risk, Global operations and the international accounting issues faced by McDonalds.

Global Operations

McDonalds operates and franchises all across the globe as it is multinational food chain industry. The menu comprises of a broad range of products whose prices varies in accordance to 100 countries worldwide in which it operates. These restaurants are managed by franchisees and by the company itself and comprises of franchise agreements and conventional franchises. This global set of operations requires a developmental license along with the international affiliation of the markets which lies under the license contracts. McDonald’s operations are designed in such a way that it ensures high quality and consistency at every restaurant outlet. When giving licenses or franchises, the corporation is generally selective and does not give the franchising to the investors who are passive. Under the agreements of conventional franchising, the company provides a part of the capital that is a requirement for the investors to invest initially. These investments require the investment in signs, equipment’s, decoration, seating and also reinvesting in the restaurant on a continuous basis. McDonalds own the buildings or land or secures the leases on long-term for both the corporation operation and franchise conventional sites of the restaurant. In such cases, the corporation participates in the reinvestment of these conventional restaurant that are franchised. An explanation regarding this selection of site is included in Part 1, Page 6 and item no. 2 of the SEC form 10-K.

The franchisees that are conventional contributes to the revenue stream of McDonalds through the payment of royalties and rent. This is linked with the sales percentage with the minimum payment of rent specified along with the starting fees that must be received upon granting the permission of new franchising term. The agreement of franchise that is conventional lasts typically for around 20 years, and the practices of franchising are consistent commonly throughout the globe. Around 70% of the restaurants that are under franchising agreement are operated globally in the franchising conventional agreement.

Under the agreement of license development, the licensees needs to invest capital for the complete business which comprises of the real estate interest. McDonalds have no capital invested in these franchises instead it receives a royalty commission based on the sales percentage as well as the starting fees. The biggest of these license agreement development operates nearly on 2,100 restaurant across 19 countries in the Caribbean and Latin America.

McDonald has an investment in equity which is in a limited affiliated foreign markets which is known as ‘affiliates’. The biggest of these affiliates is in Japan where there are around 3,200 chains. McDonald reviewed the commission of royalty on the sales percent of these markets and records its net results share in Earnings of unconsolidated affiliate’s equity.

Geographical Segmentation

McDonalds compete globally in the national, international, local and regional products of food. The geographical competition is based on the basis of convenience, services, prices, product quality, and menu variety in a highly globalized fragmented industry of restaurant. In computing the competitive position of the company, the reviews of management and the compilation of data is done on Euro monitor international. This is the leading source of data of market in relation to the international restaurant industry. The corporation’s primary completion refers to the management of the information eating out (IEO) portion which comprises of the categories of restaurant. This is defined by the International Euro monitor as a casual dining, eating establishment, juice, smoothie’s bars and self-serving cafes. The data of market relates to the café’s separately and are included in the segment of IEO.

McDonald’s business is managed as a separate geographical segment. The major chunk of the reportable segments comprises of Europe, United States, Middle East, Africa and Asia Pacific. Moreover, the geographical segment comprises of the operations in Latin America and Canada also as well as the activities of the Corporate. The geographical segment of Europe, U.S, Asia Pacific and Middle East comprises of 31%, 40% and 23% respectively of the total revenues globally. The countries of Europe such as Russia, Germany, France and U.K collectively accounts for the 67% of the sales revenues. For the equity method, 50% of the affiliates owned are under the Australia, Japan and China. The revenue of the Asia Pacific and Middle East region accounts for 54%. The major market of McDonalds in comparison to the geographical segment are Canada and the U.S.

Foreign Currency Risk

Based on the foreign currency and on the currency interest, McDonald expects the expense of interest for the full year 2014 to enhance it approximately 7% more as compared to the last year. A major chunk of the operating income of the company is generated outside the United States. Around 40% of the liabilities of the company are denominated in the international currencies. According to the SC filing, we can see that these earnings are sensitive to the international exchange rates specifically the British pound, Euro, Canadian and the Australian dollar. Combining all of these currencies we can see that this represents around 65% of the operating income of the company outside the birders of United States. If all of these 4 currencies are increased or decreased by 10%, the diluted annual EPS of McDonalds is affected by about 25 cents.

In order to manage this foreign currency risk, McDonalds mitigates this exposure by purchasing the services and goods in the domestic currency, financing in the domestic currencies and hedges the foreign currency denominated cash flows In 2011, the translation of the foreign currency had a positive effect on the consolidated results of the financial operations because of the robust Australian dollar and the Euro.

International Accounting Issues

As McDonalds is an international restaurant food chain, the impact of the alterations in the reporting of the financial requirements, principals of accounting and practices can be challenging. These international accounting issues can be the tax changes or the tax laws specifically the corporation tax reforms. This becomes an integral component in the initiative of the budgeting in the United States and other areas. The effect of this settlements or the adjustment of the future are proposed by the other authorities of Tax or the IRS. This all depends on the nature, scope and on their timing.

Other international accounting issues are kinked with the hedging items and hedging instruments. As the corporation is exposed to the market risks internationally, which includes the foreign currency fluctuations and the interest rate changes. This issues is resolved by using the derivatives instruments. These derivatives consists of mainly of the interest rate swapping, the forwards and futures, options of foreign currency, the Cash Flow, further explanation in the ‘Fair Value’ and the hedge section of ‘Net Investment’. McDonalds have entered in to the derivative contracts of equity which includes the total swaps returns, the market driven hedging changes in the supplemental and beneficial liabilities plan. These international accounting standards are tackled with the help of the hedging accounting.

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