How is the impairment amount determined 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. Capitalized projects are amortized using the straight-line method. Research and development costs, training costs and software maintenance costs are expensed as incurred.
Source: Item 21 — FINANCIAL STATEMENTS (FDD pages 51–52)
What This Means (2025 FDD)
According to the 2025 Bath Tune Up FDD, the company reviews long-lived assets for impairment when circumstances suggest that the carrying amount of those assets may not be fully recoverable. The company assesses recoverability by determining if the carrying value of an asset can be recovered over its remaining life. This determination is based on management's best estimate of the undiscounted future operating cash flows related to the asset. These cash flows exclude interest charges. An indicator of impairment exists if the sum of these undiscounted cash flows is less than the carrying value of the asset.
If impairment is indicated, the amount of impairment is the excess of the carrying value of the asset over its fair value. Fair value is determined by market price, if available. If a market price isn't available, fair value is estimated using projected future operating cash flows discounted at 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. Capitalized projects are amortized using the straight-line method, while research and development costs, training costs, and software maintenance costs are expensed as incurred.
In simpler terms, Bath Tune Up evaluates whether its assets are worth what's on the books. If an asset's expected future cash flows are less than its book value, the asset's value is written down to its fair value. This fair value is ideally based on market prices, but if those aren't available, the company estimates it using discounted cash flows. This process ensures that the financial statements accurately reflect the true value of Bath Tune Up's assets. This is a standard accounting practice to ensure assets are not overvalued on the balance sheet.