What constitutes an indicator of impairment for Bath Tune Up's long-lived assets?
Bath_Tune_Up Franchise · 2025 FDDAnswer from 2025 FDD Document
The Company reviews long-lived assets held and used and capitalized software for impairment whenever circumstances indicate that the carrying amount of assets may not be fully recoverable. If so indicated, the Company assesses the recoverability of long-lived assets by determining whether the carrying value of an asset over its remaining life can be recovered based upon management's best estimate of the undiscounted future operating cash flows (excluding interest charges) related to the long-lived asset or group of assets and liabilities in which the long-lived asset generates cash flows. If the sum of such undiscounted cash flows is less than the carrying value of the asset (group), there is an indicator of impairment. The amount of impairment, if any, represents the excess of the carrying value of the asset (group) over fair value. Fair value is determined by market price, if available, or an estimate of projected future operating cash flows discounted using a rate that reflects market participant assumptions. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value less costs to sell.
Source: Item 21 — FINANCIAL STATEMENTS (FDD pages 51–52)
What This Means (2025 FDD)
According to Bath Tune Up's 2025 Franchise Disclosure Document, an indicator of impairment exists if the sum of undiscounted future operating cash flows related to a long-lived asset or group of assets is less than the carrying value of that asset or group. This means that if Bath Tune Up believes that an asset will not generate enough cash flow to cover its book value over its remaining life, it is considered impaired.
To assess recoverability, Bath Tune Up estimates the undiscounted future operating cash flows, excluding interest charges, related to the long-lived asset. This involves projecting how much cash the asset will generate in the future. If this sum is less than the asset's carrying value, it signals impairment. The impairment amount is then calculated as the difference between the asset's carrying value and its fair value.
Fair value is determined by market price, if available. If a market price isn't available, Bath Tune Up estimates the projected future operating cash flows and discounts them using a rate that reflects market participant assumptions. Long-lived assets that are slated for disposal are reported at the lower of their carrying amount or fair value, less any costs to sell. This ensures that assets are not overvalued on the company's balance sheet.
For a prospective Bath Tune Up franchisee, this accounting practice means that the company regularly assesses the value of its assets and adjusts its financial statements to reflect any declines in value. This provides a more accurate picture of the company's financial health. It's a standard accounting practice to ensure assets are not overvalued, which could mislead investors and franchisees.