Under what conditions does Aplus test its long-lived assets for possible impairment?
Aplus Franchise · 2024 FDDAnswer from 2024 FDD Document
Long-lived assets are tested for possible impairment whenever events or changes in circumstances indicate the carrying amount of the asset may not be recoverable. If such indicators exist, the estimated undiscounted future cash flows related to the asset are compared to the carrying value of the asset. If the carrying value is greater than the estimated undiscounted future cash flows, an impairment charge is recorded in the consolidated statements of operations and comprehensive income for amounts necessary to reduce the corresponding carrying value of the asset to fair value. The impairment loss calculations require management to apply judgment in estimating future cash flows.
Source: Item 22 — CONTRACTS (FDD page 68)
What This Means (2024 FDD)
According to Aplus's 2024 Franchise Disclosure Document, long-lived assets are assessed for potential impairment when specific events or changes in circumstances suggest that the asset's carrying amount may not be recoverable. This involves comparing the estimated undiscounted future cash flows related to the asset with its carrying value.
If the carrying value exceeds the estimated undiscounted future cash flows, Aplus records an impairment charge in its consolidated statements of operations and comprehensive income. This charge reduces the asset's carrying value to its fair value. Determining the impairment loss requires management to exercise judgment in estimating future cash flows, which can be subjective and may impact the financial statements.
For a prospective Aplus franchisee, this means that the value of assets like property and equipment could be adjusted downward if their future revenue-generating potential declines. This accounting practice reflects the real-world risk that assets may lose value over time due to market changes, obsolescence, or other factors. Franchisees should be aware of these potential adjustments, as they can affect the reported profitability and asset values of Aplus.