What happens if the carrying amount of a Benihana restaurant's assets exceeds its estimated undiscounted future cash flows?
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, the company reviews long-lived assets, such as property, equipment, and right-of-use assets for operating leases, for impairment. This review occurs when events or changes suggest that the carrying value of these assets may not be fully recoverable. Benihana typically conducts this evaluation at the individual restaurant level, as it represents the lowest level of identifiable cash flows. They estimate future cash flows based primarily on historical cash flows, along with other relevant facts and circumstances, including underperformance, changes in asset use, or negative economic trends.
If the carrying amount of a Benihana 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. The fair value is determined according to ASC 820, Fair Value Measurement.
For a prospective Benihana franchisee, this means that the franchisor periodically assesses the value of its restaurants' assets. If a restaurant's assets are deemed to be worth less than their carrying amount due to poor performance or other factors, Benihana will recognize an impairment charge, reducing the reported value of those assets. This accounting practice reflects the real economic performance of the restaurant and ensures that the company's financial statements accurately represent its financial position.