For Benihana, how are leasehold improvements depreciated, and what factors determine the depreciation period?
Benihana Franchise · 2024 FDDAnswer from 2024 FDD Document
Additions to property and equipment, including leasehold improvements, are recorded at cost while costs incurred to repair and maintain the Company's operations and equipment are expensed as incurred. Depreciation is calculated using the straight-line method over the estimated useful life of the asset. When assets are retired or otherwise disposed of, the cost of the assets and the related accumulated depreciation are removed from the accounts, and any gain or loss on retirements is reflected in operating income in the year of disposition.
Computers and equipment as well as furniture and fixtures are depreciated over their useful lives from three to fifteen years. Leasehold improvements are depreciated over the shorter of their estimated useful lives or the remaining term of the associated lease. Lease terms begin on the date the Company takes possession under the lease and include option periods where failure to exercise such options would result in an economic penalty.
Source: Item 22 — CONTRACTS (FDD pages 73–74)
What This Means (2024 FDD)
According to Benihana's 2024 Franchise Disclosure Document, leasehold improvements are depreciated using the straight-line method. This means the cost of the improvements is evenly spread out over their useful life or the remaining term of the lease, whichever is shorter. The depreciation period begins when Benihana takes possession of the property under the lease.
For a prospective Benihana franchisee, this means that the cost of any improvements made to the restaurant space will be written off as an expense over time. The shorter of either the estimated useful life of the improvements or the remaining lease term will determine the exact period. This can impact the franchisee's profitability, as depreciation is a non-cash expense that reduces taxable income.
Notably, the lease term includes any option periods where failure to exercise such options would result in an economic penalty. This implies that Benihana considers potential penalties when determining the lease term, which in turn affects the depreciation period for leasehold improvements. This could lead to a longer depreciation period if the option periods are included, potentially reducing the annual depreciation expense.
Management's judgment regarding the probable lease term is crucial, considering factors like the time before option exercise, the leased asset's expected value at the end of the initial term, the lease's importance to operations, costs to negotiate a new lease, and potential contractual or economic penalties. These judgments can significantly affect the depreciation, amortization, rent expense, lease liabilities, and right-of-use assets reported by Benihana.