What is the limit on the impairment loss recognized by Americas Best Value Inn?
Americas_Best_Value_Inn Franchise · 2025 FDDAnswer from 2025 FDD Document
Goodwill is not amortized, and we test goodwill for impairment each year or more frequently should facts and circumstances indicate that it is more likely than not that the fair value is less than the carrying amount. As part of the impairment test, we may elect to perform an assessment of qualitative factors. If this qualitative assessment indicates that it is more likely than not that the fair value, including goodwill, is less than its carrying amount, or if we elect to bypass the qualitative assessment, we would then proceed with a quantitative assessment. The quantitative assessment involves calculating an estimated fair value based on projected future cash flows, and comparing the estimated fair value to the carrying amount, including goodwill. If the estimated fair value exceeds carrying value, including goodwill, no impairment is recognized. However, if the carrying amount, including
goodwill, exceeds fair value, an impairment loss is recognized in an amount equal to the excess, limited to the total goodwill balance.
We have not recognized any impairment on goodwill during the years ended December 31, 2024, 2023, and 2022.
Source: Item 21 — FINANCIAL STATEMENTS (FDD pages 70–71)
What This Means (2025 FDD)
According to the 2025 FDD, Americas Best Value Inn assesses impairment of goodwill annually or more frequently if circumstances indicate that the fair value is less than the carrying amount. If a quantitative assessment is performed and the carrying amount, including goodwill, exceeds the estimated fair value, an impairment loss is recognized. The amount of the impairment loss is equal to the excess of the carrying amount over the fair value, but this loss is limited to the total goodwill balance. This means that the recognized impairment loss cannot be greater than the total value of the goodwill that Americas Best Value Inn carries on its books.
For a prospective Americas Best Value Inn franchisee, this accounting practice is important because it affects the financial statements of the franchisor, Red Lion Hotels Corporation. Impairment losses can reduce the reported assets and net income of the company. While the FDD states that no impairment on goodwill was recognized during the years ended December 31, 2024, 2023, and 2022, it is possible that such losses could be recognized in the future if the fair value of the Americas Best Value Inn brand declines.
It is typical for franchise companies to evaluate goodwill for impairment regularly, as accounting standards require that goodwill not be amortized but instead tested for impairment. The FDD provides information about how Americas Best Value Inn's parent company, Red Lion Hotels Corporation, accounts for and reports its financial performance, which can help potential franchisees assess the financial health and stability of the franchisor.