Why was the impairment of 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, net, and the Operating lease right-of-use assets as of December 31, 2023 were $139.9 million and $95.1 m
Source: Item 22 — CONTRACTS (FDD pages 73–74)
What This Means (2024 FDD)
According to Benihana's 2024 Franchise Disclosure Document, the impairment of long-lived assets was identified as a critical audit matter due to the significant estimates and assumptions that Benihana's management makes when evaluating the recoverability of these assets. These long-lived assets include property and equipment, net, and operating lease right-of-use assets, which as of December 31, 2023, totaled $139.9 million and $95.1 million, respectively. The evaluation process necessitates a high degree of auditor judgment to determine whether management has appropriately identified impairment indicators and the reasonableness of management's undiscounted future cash flows analysis.
The impairment evaluation is performed at the individual restaurant level by comparing the carrying amount of a restaurant's assets to the estimated undiscounted future cash flows expected to be generated by those assets. If the carrying amount exceeds the estimated future cash flows, an impairment charge is recognized. Determining whether events or changes in circumstances have occurred that indicate the carrying amounts of long-lived assets may not be recoverable requires significant assumptions by management, increasing the need for auditor oversight.
To address this critical audit matter, the audit procedures included testing the effectiveness of internal controls over the company's long-lived asset impairment indicator evaluation and undiscounted future cash flow analysis. Auditors also evaluated the company's assessment of impairment indicators by testing restaurant assets for indications of impairment, such as locations with current or projected losses. They performed inquiries of management regarding their processes and assumptions and inspected board minutes, public statements, operating plans, and industry data to identify any contradictory evidence. The completeness and accuracy of the underlying source information used by management to identify quantitative indicators of impairment were also tested.