Why was the determination of possible impairment indicators for long-lived assets identified as a critical audit matter for Benihana?
Benihana Franchise · 2024 FDDAnswer from 2024 FDD Document
rment — Refer to Note 2 to the financial statements
Critical Audit Matter Description
Long-lived assets, which includes 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 values of
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restaurant level. Recoverability of restaurant assets is measured by a comparison of the carrying amount of an individual restaurant's assets to the estimated
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undiscounted future cash flows expected to be generated by those restaurant assets. 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 accordance with ASC 820, Fair Value Measurement. Property and equipment, ne
Source: Item 22 — CONTRACTS (FDD pages 73–74)
What This Means (2024 FDD)
According to Benihana's 2024 Franchise Disclosure Document, the determination of possible impairment indicators for long-lived assets was identified as a critical audit matter due to the significant assumptions made by management when determining whether events or changes in circumstances have occurred that indicate the carrying amounts of long-lived assets may not be recoverable. This determination required a high degree of auditor judgment and an increased extent of effort when performing audit procedures to evaluate whether management appropriately identified impairment indicators. Long-lived assets include property and equipment and right-of-use assets for operating leases. As of December 31, 2023, Benihana's property and equipment, net, totaled $139.9 million, and operating lease right-of-use assets totaled $95.1 million.
For a Benihana restaurant, the recoverability of restaurant assets is measured by comparing the carrying amount of an individual restaurant's assets to the estimated undiscounted future cash flows expected to be generated by those assets. If the carrying amount of a restaurant's assets exceeds its estimated undiscounted future cash flows, an impairment charge is recognized. This charge is equal to the amount by which the carrying amount of the asset exceeds its fair value, with the estimated fair value determined in accordance with ASC 820, Fair Value Measurement.
The audit procedures related to the evaluation of long-lived asset impairment indicators included testing the effectiveness of internal controls over the company's long-lived asset impairment indicator evaluation. Auditors also evaluated the reasonableness of the company's evaluation of impairment indicators by testing long-lived restaurant assets for possible indications of impairment, including searching for locations with current period losses or projected losses. They performed inquiries of management regarding the process and assumptions used to identify potential indicators of impairment and evaluated the consistency of the assumptions with evidence obtained in other areas of the audit. Additionally, the auditors inspected minutes of the board of directors, the company's public statements, operating plans, and industry data to identify any evidence that may contradict management's assumptions. The completeness and accuracy of the underlying source information used by management to identify quantitative indicators of impairment were also tested.
For a prospective Benihana franchisee, this critical audit matter highlights the importance of understanding how the company assesses the value of its assets and the potential for impairment. It also underscores the role of management's judgment and assumptions in this process, which can impact the financial statements. Franchisees should be aware of the factors that could trigger an impairment review and how these factors could affect the financial performance of their restaurants.