Course

Intermediate Accounting

Submitted by
Shaharyar Naeem

Submitted to
Mrs. Nadia Ibn Hassan

Submission Date
November 29, 2019
INTRODUCTION:

McDonald’s corporate vision is “to move with velocity to drive

profitable growth and become an even better McDonald’s serving
more customers delicious food each day around the world.”
And its corporate mission is “to be our customers’ favorite place
and way to eat and drink.” 

McDonald's Corporation is an American fast food company,

founded in 1940 as a restaurant operated by Richard and Maurice McDonald, in San Bernardino,
California, United States. They rechristened their business as a hamburger stand, and later turned
the company into a franchise, with the Golden Arches logo being introduced in 1953 at a
location in Phoenix, Arizona. In 1955, Ray Kroc, a businessman, joined the company as a
franchise agent and proceeded to purchase the chain from the McDonald brothers. McDonald's
had its original headquarters in Oak Brook, Illinois, but moved its global headquarters
to Chicago in early 2018.

McDonald's is the world's largest restaurant chain by revenue, serving over 69 million customers

daily in over 100 countries across 37,855 outlets as of 2018. Although McDonald's is best known
for its hamburgers, cheeseburgers and French fries, they also feature chicken
products, breakfast items, soft drinks, milkshakes, wraps, and desserts. In response to changing
consumer tastes and a negative backlash because of the unhealthiness of their food, the company
has added to its menu salads, fish, smoothies, and fruit. The McDonald's Corporation revenues
come from the rent, royalties, and fees paid by the franchisees, as well as sales in company-
operated restaurants. According to two reports published in 2018, McDonald's is the world's
second-largest private employer with 1.7 million employees (behind Walmart with 2.3 million
employees).
EQUITY:

The number of shareholders of record and beneficial owners of the Company’s common stock as
of January 31, 2019 was estimated to be 2,150,000. Given the Company’s returns on incremental
invested capital and significant cash provided by operations, management believes it is prudent
to reinvest in the business in markets with acceptable returns and/or opportunity for long-term
growth and use excess cash flow to return cash to shareholders through dividends and share
repurchases. The Company has paid dividends on common stock for 43 consecutive years
through 2018 and has increased the dividend amount at least once every year. As in the past,
future dividend amounts will be considered after reviewing profitability expectations and
financing needs, and will be declared at the discretion of the Company’s Board of Directors.

In 2018, the Company returned approximately $8.5 billion to shareholders through a

combination of shares repurchased and dividends paid. This brings the cumulative two-year
return to shareholders to $16.2 billion toward targeted return of about $25 billion for the three-
year period ending 2019. The Company has paid dividends on its common stock for 43
consecutive years and has increased the dividend amount every year. The 2018 full year
dividend of $4.19 per share reflects the quarterly dividend paid for each of the first three quarters
of $1.01 per share, with an increase to $1.16 per share paid in the fourth quarter. This 15%
increase in the quarterly dividend equates to a $4.64 per share annual dividend and reflects the
Company’s confidence in the ongoing strength and reliability of its cash flow.
REVENUE:

The Company’s revenues consist of sales by Company-operated restaurants and fees from
franchised restaurants operated by conventional franchisees, developmental licensees and foreign
affiliates. Revenues from conventional franchised restaurants include rent and royalties based on
a percent of sales with minimum rent payments, and initial fees. Revenues from restaurants
licensed to foreign affiliates and developmental licensees include a royalty based on a percent of
sales, and may include initial fees. ASC 606 provides that revenues are to be recognized when
control of promised goods or services is transferred to a customer in an amount that reflects the
consideration expected to be received for those goods or services. This standard does not impact
the Company's recognition of revenue from Company operated restaurants as those sales are
recognized on a cash basis at the time of the underlying sale and are presented net of sales tax
and other sales-related taxes. The standard also does not change the recognition of royalties from
restaurants operated by franchisees or licensed to affiliates and developmental licensees, which
are based on a percent of sales and recognized at the time the underlying sales occur. Rental
income from restaurants operated by conventional franchisees is also not impacted by this
standard as those revenues are subject to the guidance in ASC 840, "Leases." The standard does
change the timing in which the Company recognizes initial fees from franchisees for new
restaurant openings and new franchise terms. The Company's accounting policy through
December 31, 2017, was to recognize initial franchise fees when received, upon a new restaurant
opening and at the start of a new franchise term. Beginning in January 2018, initial franchise fees
have been recognized as the Company satisfies the performance obligation over the franchise
term, which is generally 20 years. The Company adopted ASC 606 as of January 1, 2018, using
the modified retrospective method. This method allows the standard to be applied retrospectively
through a cumulative catch up adjustment recognized upon adoption. As such, comparative
information in the Company’s financial statements has not been restated and continues to be
reported under the accounting standards in effect for those periods. The cumulative adjustment
recorded upon adoption of ASC 606 consisted of deferred revenue of approximately $600
million within long-term liabilities and approximately $150 million of associated adjustments to
the deferred tax balances which are recorded in Deferred income taxes and Miscellaneous other
assets on the Consolidated Balance Sheet.

LEASES:

At December 31, 2018, the Company was the lessee at 12,334 restaurant locations through
ground leases (the Company leases the land and the Company generally owns the building) and
through improved leases (the Company leases land and buildings). Lease terms for most
restaurants, where market conditions allow, are generally for 20 years and, in many cases,
provide for rent escalations and renewal options, with certain leases providing purchase options.
Escalation terms vary by market with examples including fixed-rent escalations, escalations
based on an inflation index and fair-value market adjustments. The timing of these escalations
generally ranges from annually to every five years. For most franchised locations, the related
occupancy costs including property taxes, insurance and site maintenance; are required to be paid
by the franchisees as part of the franchise arrangement. In addition, the Company is the lessee
under non-restaurant related leases such as office buildings, vehicles and office equipment.
The Company has long-term contractual obligations primarily in the form of lease obligations
(related to both Company-operated and franchised restaurants) and debt obligations.

INCOME TAXES:

In 2018 , 2017 and 2016 , the reported effective income tax rates were 24.2% , 39.4% and
31.7%, respectively. The effective income tax rate for 2018 reflected approximately $75 million
of net tax cost associated with the 2018 adjustments to the provisional amounts recorded in the
prior year under the Tax Act. Excluding the impact of the Tax Act and the current year
impairment charges, the effective income tax rate was 22.9% for 2018. Excluding the prior year
provisional net tax cost of approximately $700 million under the Tax Act, the effective income
tax rate was 31.6% for 2017. Excluding the impact of the Tax Act and the current year
impairment charges, the lower effective income tax rate for 2018 reflected the reduction in the
U.S. corporate tax rate from 35% to 21% in 2018. In addition, both 2018 and 2017 reflected a
benefit from a change in tax reserves as a result of global audit progression. Consolidated net
deferred tax liabilities included tax assets, net of valuation allowance, of $2.0 billion in 2018 and
$1.5 billion in 2017 . Substantially all of the net tax assets are expected to be realized in the U.S.
and other profitable markets.

The Company records a valuation allowance to reduce its deferred tax assets if it is considered
more likely than not that some portion or all of the deferred assets will not be realized. While the
Company has considered future taxable income and ongoing prudent and feasible tax strategies,
including the sale of appreciated assets, in assessing the need for the valuation allowance, if
these estimates and assumptions change in the future, the Company may be required to adjust its
valuation allowance. This could result in a charge to, or an increase in, income in the period such
determination is made. The Company operates within multiple taxing jurisdictions and is subject
to audit in these jurisdictions. The Company records accruals for the estimated outcomes of these
audits, and the accruals may change in the future due to new developments in each matter.
EARNINGS PER SHARE:

In 2018, net income increased 14% (13% in constant currencies) to $5.9 billion and diluted
earnings per common share increased 18% (18% in constant currencies) to $7.54. Foreign
currency translation had a positive impact of $0.04 on diluted earnings per share. In 2017, net
income increased 11% (11% in constant currencies) to $5.2 billion and diluted earnings per
common share increased 17% (17% in constant currencies) to $6.37. Foreign currency
translation had no impact on diluted earnings per share. Results in 2018 reflected a lower
effective tax rate, and stronger operating performance due to an increase in sales-driven
franchised margin dollars, partly offset by lower Company-operated margin dollars due to the
impact of refranchising. Results in 2017 reflected stronger operating performance, G&A savings,
improved performance in Japan, and the benefit of a reversal of a valuation allowance on a
deferred tax asset in Japan.

Included in the full year 2018 results were:

◦ approximately $140 million, or $0.17 per share, of non-cash impairment charges;

◦ pre-tax strategic restructuring charges of $94 million, or $0.09 per share (of which $85 million
relates to the restructuring of the U.S. business); and
◦ approximately $75 million, or $0.10 per share, of net tax cost associated with 2018 adjustments
to the provisional amounts recorded in the prior year under the Tax Cuts and Jobs Act ("Tax
Act").

Included in the full year 2017 results were:

◦ approximately $700 million, or $0.82 per share, of net tax cost associated with the Tax Act; and
◦ a pre-tax gain of approximately $850 million on the sale of the Company’s businesses in China
and Hong Kong, offset in part by $150 million of restructuring and impairment charges in
connection with the Company’s global G&A and refranchising initiatives, for a net benefit of
$0.53 per share

Excluding these 2018 and 2017 items, 2018 net income was $6.2 billion, an increase of 14%
(14% in constant currencies), and diluted earnings per share was $7.90, an increase of 19% (18%
in constant currencies). Excluding items impacting 2017 and the 2016 strategic charges of $342
million, 2017 net income was $5.4 billion, an increase of 10% (10% in constant currencies), and
diluted earnings per share was $6.66, an increase of 16% (16% in constant currencies). The
Company repurchased 32.2 million shares of its stock for $5.2 billion in 2018 and 31.4 million
shares of its stock for $4.6 billion in 2017, driving reductions in weighted-average shares
outstanding on a diluted basis in both periods, which positively benefited earnings per share.

CONCLUSION:

Total of five Chapters were applied to this corporation which included Equity, Revenue, Dilutive
securities and earnings per share, Accounting for income taxes and Accounting for leases. The
latest financial statements of 2018 extracted from the Annual report were used to apply all the
concepts. In the equity section, purchases of equity from the month of October to December
were recognized and reported, the average price per share and the total shares issued were also
available. In the next section (revenues) different types of revenues incoming were recognized
which included rent, franchising and royalties. In the leases section it was recognized that the
Company was the lessee at 12,334 restaurant locations through ground leases and through
improved leases, in addition, the Company is the lessee under non-restaurant related leases such
as office buildings, vehicles and office equipment. In the Income tax portion, the calculation of
net income has been shown and the effective income tax rate for 2018 reflected approximately
$75 million of net tax cost associated with the 2018 adjustments to the provisional amounts
recorded in the prior year under the Tax Act. In the earnings per share both diluted and basic
earnings per share were recognized
APPENDIX: