What industry data was compared to management's projections when evaluating the reasonableness of Benihana's undiscounted future cash flows analysis?
Benihana Franchise · 2024 FDDAnswer from 2024 FDD Document
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to impairment of long-lived assets included the following, among others:
- We tested the effectiveness of internal controls over the Company's long lived asset impairment indicator evaluation and undiscounted future cash flow analysis.
- We evaluated the Company's evaluation of impairment indicators by:
- Testing long-lived restaurant assets for indications of impairment, including evaluating locations with current period losses or projected losses
- Performing inquiries of management regarding the process and assumptions used to identify potential indicators of impairment and evaluating the consistency of the assumptions with evidence obtained in other areas of the audit.
- Inspecting 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.
- We evaluated the reasonableness of management's undiscounted future cash flows analysis by comparing management's projections to (1) the Company's historical results, (2) internal communications to management and the Board of Directors, (3) external communications made publicly by management, and (4) industry data.
- We tested the completeness and accuracy of the underlying source information used by management to identify quantitative indicators of impairment.
Source: Item 22 — CONTRACTS (FDD pages 73–74)
What This Means (2024 FDD)
According to Benihana's 2024 Franchise Disclosure Document, when evaluating the reasonableness of management's projections for undiscounted future cash flows, the projections were compared to several factors. These factors include the company's historical results, internal communications to management and the Board of Directors, external communications made publicly by management, and industry data. This process is part of assessing potential impairment of long-lived assets.
For a prospective Benihana franchisee, this means that the franchisor's financial projections are rigorously vetted against multiple internal and external benchmarks, including industry data. This suggests a degree of due diligence in ensuring the financial forecasts are reasonable.
The audit procedures related to impairment of long-lived assets include testing the effectiveness of internal controls over the Company's long lived asset impairment indicator evaluation and undiscounted future cash flow analysis. The company's evaluation of impairment indicators is also evaluated by testing long-lived restaurant assets for indications of impairment, including evaluating locations with current period losses or projected losses. Management also performs inquiries regarding the process and assumptions used to identify potential indicators of impairment and evaluating the consistency of the assumptions with evidence obtained in other areas of the audit.
This thoroughness in assessing financial projections could provide some reassurance to a potential franchisee. However, it's important to remember that these are still projections and subject to various economic and market conditions. A franchisee should still conduct their own independent financial analysis and consult with financial advisors to assess the viability of the franchise opportunity.