The Second Cup Ltd. is Canada’s largest specialty coffee café franchisor (as measured by number of cafés) with 365 cafés operating under the trade name Second Cup. Exhibit 10-18 is an excerpt from Note 21 from the company’s 2013 annual report detailing Second Cup’s commitments.
In Exhibit 10-18:
EXCERPT FROM THE SECOND CUP LTD.’S 2013 ANNUAL REPORT
22. CONTINGENCIES, COMMITMENTS AND GUARANTEES
The Coffee “C” contract is the world benchmark for Arabica coffee. The contract prices physical delivery of exchange grade green beans from one of 19 countries of origin in a licensed warehouse to one of several ports in the U.S. and Europe, with stated premiums/discounts. Second Cup sources high altitude Arabica coffee which tends to trade at a premium above the “C” coffee commodity price. Second Cup has contracts with third party companies to purchase the coffee that is sold in all Second Cup cafés. In terms of these supply agreements, Second Cup has guaranteed a minimum volume of coffee purchases of $5,621 USD (2012 – $4,421 USD) during fiscal 2014. The coffee purchase commitment is comprised of three components: unapplied futures commitment contracts, fixed price physical contracts and at price physical contracts.
Explain this note in your own words. Be sure to discuss the financial statement impacts, if any, of this roasting contract and the financial statement impacts it will have in future years.