In the context of Benihana's long-lived asset impairment, what happens when the carrying amount of an individual restaurant's assets exceeds its estimated undiscounted future cash flows?
Benihana Franchise · 2024 FDDAnswer from 2024 FDD Document
(the](https://franchimp.com) "TCJA"), which, amongst other things, enacted global intangible low-taxed income provisions that do not allow us to defer the earnings of our U.K. and Italy subsidiaries.
Impairment of Long-Lived Assets and Disposal of Property and Equipment
Long-lived assets, which include property and equipment and right-of-use assets for operating leases, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of these assets may not be fully recoverable. The impairment evaluation is generally performed at the individual restaurant level, as we believe this is the lowest level of identifiable cash flows. We believe that historical cash flows, in addition to other relevant facts and circumstances, are the primary basis for estimating future cash flows. Relevant facts and circumstances include, among others, significant underperformance relative to historical or projected future operating results, significant changes in the manner of use of the acquired assets or the strategy for the overall business, and significant negative industry or economic trends. Recoverability of restaurant assets is measured by a comparison of the carrying amount of an individual restaurant's assets to the estimated identifiable undiscounted future cash flows expected to be generated by those restaurant assets. This process requires the use of estimates and assumptions, which are subject to a high degree of judgment. If the carrying amount of an individual restaurant's assets exceeds its estimated undiscounted future cash flows an impairment charge is recognized as the amount by which the carrying amount of the asset exceeds its fair value. The estimated fair value is determined for these assets in a
Source: Item 22 — CONTRACTS (FDD pages 73–74)
What This Means (2024 FDD)
According to Benihana's 2024 Franchise Disclosure Document, long-lived assets like property, equipment, and right-of-use assets for operating leases are regularly assessed for impairment. This evaluation occurs at the individual restaurant level. The brand compares the carrying amount of a restaurant's assets to the estimated undiscounted future cash flows those assets are expected to generate.
If the carrying amount of a Benihana restaurant's assets surpasses its estimated undiscounted future cash flows, the company recognizes an impairment charge. This charge reflects the amount by which the carrying amount of the asset exceeds its fair value. The fair value is determined according to ASC 820, Fair Value Measurement.
For a prospective Benihana franchisee, this means that the franchisor periodically assesses whether the value of its restaurants' assets has declined. If a restaurant's assets are deemed to be worth less than their carrying amount due to poor performance or other factors, Benihana will write down the value of those assets, recognizing an impairment charge. This accounting practice can affect the company's financial statements and may signal potential challenges at specific locations.
It is important to note that these impairment evaluations involve significant estimates and assumptions by Benihana's management, requiring judgment about future cash flows and fair values. While no impairment losses related to long-lived assets were recognized for the years ended December 31, 2021, 2022 and 2023, this process is a critical part of Benihana's financial reporting and is closely scrutinized by auditors.