At what level are Benihana's restaurant assets reviewed for impairment?
Benihana Franchise · 2024 FDDAnswer from 2024 FDD Document
pacted by the enactment of the Tax Cuts and Job Act in December 2017 (the "TCJA"), which, amongst other things, enacted global intangible low-taxed income provisions that do not allow us to defer the earnings of our U.K. and Italy subsidiaries.
Impairment of Long-Lived Assets and Disposal of Property and Equipment
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. Property and equipment, net of accumulated depreciation, and the operating lease right-of-use assets as of December 31,2021 were $69.6 million and $85.4 million, respectively.
Source: Item 22 — CONTRACTS (FDD pages 73–74)
What This Means (2024 FDD)
According to Benihana's 2024 Franchise Disclosure Document, the company reviews long-lived assets for impairment at the individual restaurant level. This includes property, equipment, and right-of-use assets for operating leases. Benihana conducts this review whenever events or changes in circumstances suggest that the carrying value of these assets may not be fully recoverable. The company believes that evaluating impairment at the individual restaurant level is appropriate because it represents the lowest level at which identifiable cash flows can be determined.
Benihana uses historical cash flows and other relevant facts to estimate future cash flows when assessing recoverability. These facts can include significant underperformance, changes in asset use, shifts in business strategy, and negative industry or economic trends. The recoverability of a restaurant's assets is determined by comparing the carrying amount of those assets to the estimated future cash flows expected to be generated by them.
This process involves estimates and assumptions that require considerable judgment. If the carrying amount of a restaurant's assets exceeds its estimated undiscounted future cash flows, Benihana recognizes an impairment charge. The charge is equal to the amount by which the carrying amount of the asset exceeds its fair value, which is determined according to ASC 820, Fair Value Measurement. As of December 31, 2022, the net value of property and equipment was $94.1 million, and operating lease right-of-use assets were $85.2 million. For the year ended December 31, 2022, Benihana did not recognize any impairment loss related to long-lived assets.
Prospective franchisees should understand that the impairment evaluation process is subjective and relies on estimates of future cash flows. Changes in economic conditions or the performance of an individual restaurant could lead to impairment charges, which could negatively impact Benihana's financial results. Franchisees may want to inquire about the specific factors that Benihana considers when evaluating impairment and how these factors could affect the value of their investment.