At what level are Benihana's restaurant assets assessed for recoverability?
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 assesses the recoverability of long-lived assets, such as property, equipment, and right-of-use assets for operating leases, at the individual restaurant level. This is because Benihana believes that the individual restaurant is the lowest level at which identifiable cash flows can be accurately measured.
This means that if events or changes in circumstances suggest that the carrying value of these assets may not be fully recoverable, Benihana will evaluate the potential impairment at each restaurant location. This evaluation involves comparing the carrying amount of the restaurant's assets to the estimated future cash flows expected to be generated by those assets. Factors considered include historical cash flows, underperformance relative to projections, changes in asset use, business strategy shifts, and industry or economic trends.
For a prospective Benihana franchisee, this assessment practice is important because it directly affects the financial performance and valuation of their specific restaurant. If a restaurant's assets are deemed impaired, Benihana will recognize an impairment charge, which is the amount by which the carrying amount of the assets exceeds their fair value. This can impact the franchisee's profitability and the overall financial health of their business.
It is important to note that the recoverability assessment involves estimates and assumptions that require a high degree of judgment. Therefore, franchisees should understand the factors that Benihana considers in these assessments and how they might affect their restaurant's financial performance. Franchisees should also be aware that the accuracy of these provisions can vary materially from original estimates, and management regularly monitors the adequacy of the provisions until final disposition occurs.