CASE

ERASMUS BREWERY BV
TABLE OF CONTENT

• Company history
• Organization and structure
• Product and technology
• Financial accounting and reporting policies
• Contract arrangements with the key stakeholders
• Management accounting policies and assumptions

LIST of SUB-CASES

1. Case 1 FA: Role of financial reporting, IFRS, and IASB Conceptual Framework
2. Case 2 FA: Accounting cycle, trial, and classified balance
3. Case 3 FA: Accounts receivables and bad debt expense
4. Case 4 FA: Accounting for inventories I – FIFO, LIFO, WA
5. Case 5 MA: Costing systems – job-order
6. Case 6 FA: Accounting for inventories II – LCNRV
7. Case 7 MA: Costing systems – process costing
8. Case 8 FA: PPE I – acquisition, depreciation, and depletion
9. Case 9 FA: PPE II – impairment and revaluation
10. Case 10 MA: CVP analysis and cost behavior
11. Case 11 MA: Capital investments and NPV
12. Case 12 MA: Budgeting

Page 1 of 7
COMPANY HISTORY

The ERASMUS BREWERY BV was set up by the two brothers Geert and Thomas in 2005.
They started brewing small batches of specialty beer, later the business is expanded with a
Pilsner production lines. The brothers form the two main players in the management team.

ORGANIZATION & STRUCTURE

The production lines for Pilsner and Specialty Beer are treated as separate responsibility
centers (cost centers). The shorten organogram is depicted below.

Management

Accounting
Dept., IT, HR

Sales and Pilsner Craft Beer Maintenance

marketing Division Division & repairs

PRODUCT AND TECHNOLOGY

Craft Beer (also know as specialty beer, or “speciaal bier” in Dutch): All large brewers buy their
Malts (the grain), hops and yeast. The technological process is briefly outlined below.
Brewing
The malts are ground and then processed with a lot of water for mashing. During mashing the
grains and water are heated to different temperatures between 62 and 78 degrees and then kept
there for some minutes. This breaks the carbohydrates in the malts down to fermentable sugar.
Mashing happens in a special Mash kettle. Then the sugary water is filtered to get rid of the
grains, some extra water is flushed through the grains to get the last of the sugar. The sugary
water is flushed through pipes to the next kettle, the boiling or cooking kettle. The extra water
usually comes from a separate kettle, as it also needs to be warm. The same Kettle is usually
used to have heated water for cleaning. The amount of sugar that is flushed out is called the
brewhouse efficiency, a percentage that shows what percentage of the expected amount of
sugar in the grain is actually captured. This would be KPI in most breweries, particularly for
Pilsner. Then cooking in the cooking kettle. The wort (unfermented beer) is brought to a boil
and hops are added, if additional sugar is required it is added here. After the hopping and
boiling, the wort is filtered again to remove the hop-bells. Usually a separate centrifuge is used
for this. The wort is quickly cooled in a cooler. and then send to the first yeast tank.

Page 2 of 7
Fermentation
Once the wort is in the fermentation tank, yeast is added (After chemical checks usually).
Specialty beers are then pumped to the next yeasting tank and filtered to remove dead yeast
(dead yeast will build in the first week, and it is disgusting). This happens at around room
temperature. The second fermentation happens in similar fermentation tanks. After the second
yeasting (and filtering if required) the beer is packaged, so either bottled, pumped to kegs or
tanks. There it can ripen further if necessary, but in essence it is ready for sale.

Pilsner: Pilsner is a more industrial process; this basically means that they usually do not have
a kettle that is used twice. You can start more batches if you have a separate kettle for
everything. The large brew houses can start a new batch several times per day in these linear
processes, while the reuse of the kettle in the specialty beer process makes that impossible. The
steps in the brewing process are the same. For Pilsner, the fermentation process is slightly
different, the tanks are larger, and first fermentation cooled to about 12 degrees. A different
type of yeast is used that works at these low temperatures and has fewer side-products (more
industrial taste). Second fermentation is much shorter, and ripening is much shorter. Because
the quantity is larger and because the larger quantity allows more specialized equipment, pilsner
is more capital intensive in its structure.

FINANCIAL ACCOUNTING AND REPORTING POLICIES

“ERASMUS BREWERY BV” is a legal entity registered with the Chamber of Commerce. The
company does not control any fully or partly owned subsidiaries. Although not mandatory, the
company opts to apply IFRS in its financial statements as of 2005. In case IFRS and/or IFRIC
(official interpretations of IFRS) lack guidance on a specific transaction, the company adheres
to IASB Conceptual Framework in its reporting choices. Financial statements and
accompanying disclosures are audited by the “Good Auditor” BV.

Going concern: The financial statements are prepared under the going concern assumption.

Monetary unit: All accounts are stated in euros.

Measurement models: Unless otherwise indicated, the company carries its assets and
liabilities at historical costs. Where relevant and allowed, the company applies fair value
accounting.

Accrual principle: In accordance with IFRS, the company applies accrual-based accounting
for all assets and liabilities accept those for which cash-based accounting is required (e.g. for
cash and cash equivalents).

Page 3 of 7
Revenue is recognized in accordance with IFRS 15, i.e. the revenue is booked to Income
Statement when the performance obligation towards a customer is satisfied.

Managerial judgement: Financial statements incorporate estimates made by the company

management. Financial statements also reflect management judgements in how to apply
accounting policies. Estimates and judgments are continuously evaluated and updated. The
company uses historical data, past experience and expectations of future events to arrive at an
estimate or a choice of accounting policy. The management believes the estimates to be
reliable.

Depreciation: Unless otherwise indicated, the company applies straight-line depreciation for
its long-term assets.

Depletion rate is based on geotechnical estimation of the available minerals; in total 20,000
liters of minerals are available; and 1 liter of beer consumes 1 ml of the minerals.

Impairment and revaluation: In accordance with IFRS, the company reviews all its assets
and liabilities for signs of impairment. For long-term assets, the reviews are carried out on an
annual basis; for current assets – on a monthly basis.

Inventories: The company carries inventory at cost under weighted-average cost flow
assumptions. Under- or over-allocation of fixed manufacturing overheads is written off to the
Income Statement at the end of each month.

Discount rate: Unless indicated otherwise, in all its transactions which are recorded on a
discounted basis the company applies the discount rate of 10% per annum.

CONTRACT ARRANGEMENTS WITH THE KEY STAKEHOLDERS

- Suppliers of direct and indirect material: All purchases of direct (raw) materials are
on credit. All direct materials are purchased on the first working day of the month; and
all payments on indebtedness to suppliers of direct materials are done on the first
Monday of the next month.

- Suppliers of services: Unless indicated otherwise, services are procured on credit and
are paid in full on the first working day of the next month.

- Rent of direct materials warehousing and production facilities is paid two-month in

advance starting on Dec 31.

- Insurance of direct materials warehousing and production facilities is paid three-

month in advance starting on Dec 31.

Page 4 of 7
 - Customers’ indebtedness is reviewed on monthly basis for signs of impairment. The
expected credit loss on accounts receivables is estimated using the aging of accounts
approach and is recognized in Income Statement. Sales returns & Allowances and
Discounts are accepted or granted only on credit sales. The ending balance on the
return allowance is immaterial.

- Payment to employees: Direct labor wages and non-manufacturing personnel salaries

are paid on the second Friday of the next month.

MANAGEMENT ACCOUNTING POLICIES AND ASSUMPTIONS

The company cost structure includes the following costs:

Direct and indirect variable product costs:

• Direct materials (hop, malts, yeast, flavors, and mineral water at stated depletion rate)
• Direct labor (brewers)
• Electricity & utilities for the production and direct material warehousing
• Transportation direct material
• Indirect materials (crates, cartons, pallets, and such like)
• Indirect labor (packaging and warehouse personnel, shift supervisors)

Direct and indirect fixed product costs:

• Rent of production and direct material warehousing facilities
• Cleaning & maintenance of the production equipment
• Insurance of production and direct material warehousing facilities
• Depreciation of production facilities

Period costs:
• Salaries non-manufacturing employees and management
• Administrative fix expenses (e.g. employees’ canteen and office expenses)
• Administrative variable expense (e.g., customer support expenses)
• Sales and marketing fix expenses (e.g. advertisement agency fee)
• Sales and marketing variable expenses (e.g. point-of-sale giveaways)
• Office building depreciation

Page 5 of 7
 • Bad debt expense
• Interest expense
• Other expenses

Cost allocation policy

Indirect production costs are allocated to the divisions based on the direct labor costs. Pilsner
division uses process costing to allocate manufacturing costs to work-in-progress and finished
goods. Craft division applies job costing; overheads are allocated to specific jobs based on the
direct labor costs.

Budgeting process
The company has a large annual budget that sets the targets and makes means available for
both divisions and the staff departments. Within each production division and department,
budgets are reviewed and updated monthly.

Responsibility centers and performance evaluation

Both production divisions act as separate performance centers. Maintenance and sales services
are both delivered by the centralized staff departments, but the divisions can adjust the amount
of service they get. Department and divisional performance is measured based on revenue and
costs of the relevant division/department.

Page 6 of 7