What factors does Benihana consider as relevant facts and circumstances when evaluating impairment?
Benihana Franchise · 2024 FDDAnswer from 2024 FDD Document
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 accordance with ASC 820, Fair Value Measurement.
Source: Item 22 — CONTRACTS (FDD pages 73–74)
What This Means (2024 FDD)
According to Benihana's 2024 Franchise Disclosure Document, when evaluating the impairment of long-lived assets, Benihana considers several factors as relevant facts and circumstances. These include significant underperformance relative to historical or projected future operating results, which suggests that a restaurant is not meeting its expected financial targets. Benihana also considers significant changes in the manner of use of the acquired assets or the strategy for the overall business, indicating a shift in how the restaurant's assets are utilized or a change in the broader business plan. Lastly, significant negative industry or economic trends are taken into account, reflecting the impact of external factors on the restaurant's performance.
Benihana primarily relies on historical cash flows, in addition to other relevant facts and circumstances, as the basis for estimating future cash flows. The impairment evaluation is generally performed at the individual restaurant level because Benihana believes this is the lowest level of identifiable cash flows. Recoverability of restaurant assets is measured by comparing 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 evaluation 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. This charge is equivalent 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.
For a prospective franchisee, understanding these factors is crucial as they directly impact the financial health and valuation of their Benihana restaurant. If any of these negative factors are present, it could lead to an impairment charge, reducing the value of the restaurant's assets. Therefore, franchisees should carefully monitor their restaurant's performance, adapt to changes in the business environment, and stay informed about industry and economic trends to mitigate the risk of impairment.