At what level is the impairment evaluation generally performed for Benihana restaurants?
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 impairment evaluation for long-lived assets is generally performed at the individual restaurant level. Benihana believes this is the lowest level at which identifiable cash flows can be determined. Long-lived assets include property, equipment, and right-of-use assets for operating leases.
This means that each Benihana restaurant is assessed separately to determine if its assets have lost value. This evaluation is triggered when events or changes in circumstances suggest that the carrying value of these assets may not be fully recoverable. Factors considered include underperformance relative to historical or projected operating results, changes in asset use or overall business strategy, and negative industry or economic trends.
The recoverability of a restaurant's assets is determined by comparing the carrying amount of its 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. This charge is the amount by which the carrying amount of the asset exceeds its fair value, which is determined in accordance with ASC 820, Fair Value Measurement. This process involves estimates and assumptions, requiring a high degree of judgment from Benihana's management.
For a prospective franchisee, this indicates that the financial performance of each Benihana restaurant is closely monitored. If a restaurant's performance declines significantly, Benihana will assess whether the value of its assets needs to be written down. This can affect the overall financial health of Benihana and potentially impact franchisees if it signals broader issues within the system.