How does Benihana depreciate leasehold improvements?
Benihana Franchise · 2024 FDDAnswer from 2024 FDD Document
[Item 22: CONTRACTS]
Inventory
Inventories, which consist of food, liquor and other beverages, are stated at the lower of cost or net realizable value. Cost is determined by the first in, first out method. Net realizable value is defined as the estimated selling price in the ordinary course of business, less reasonably predictable costs to sell. As of December 31, 2023 and 2022, food inventories were $4.0 million and $3.7 million, respectively, and beverage inventories were $2.2 million and $2.0 million, respectively.
Property and Equipment
Additions to property and equipment, including leasehold improvements, are recorded at cost while costs incurred to repair and maintain the Company's operations and equipment are expensed as incurred. Depreciation is calculated using the straight-line method over the estimated useful life of the asset. When assets are retired or otherwise disposed of, the cost of the assets and the related accumulated depreciation are removed from the accounts, and any gain or loss on retirements is reflected in operating income in the year of disposition.
Computers and equipment as well as furniture and fixtures are depreciated over their useful lives from three to fifteen years. Leasehold improvements are depreciated over the shorter of their estimated useful lives or the remaining term of the associated lease. Lease terms begin on the date the Company takes possession under the lease and include option periods where failure to exercise such options would result in an economic penalty.
Other Assets
Other assets include liquor license acquisition costs and costs to fulfill obligations under the Company's management and license agreements.
Intangible Assets
Source: Item 22 — CONTRACTS (FDD pages 73–74)
What This Means (2024 FDD)
According to Benihana's 2024 Franchise Disclosure Document, leasehold improvements are depreciated using the straight-line method. This means the cost of the improvements is spread evenly over their useful life. However, Benihana uses the shorter of either the estimated useful life of the improvements or the remaining term of the associated lease.
For a Benihana franchisee, this means that if the lease term is shorter than the useful life of the improvements, the depreciation expense will be recognized over the lease term. The lease term begins when Benihana takes possession of the property and includes any option periods where failure to exercise such options would result in an economic penalty. This can impact the franchisee's financial statements, as depreciation is a non-cash expense that affects net income.
It's important for prospective Benihana franchisees to understand the terms of their lease agreements and the estimated useful lives of any leasehold improvements they make. This will help them accurately forecast their depreciation expense and understand the impact on their profitability. Additionally, franchisees should be aware that Benihana's accounting practices, such as the straight-line depreciation method, can affect how their financial performance is presented.