How does Benihana's management identify quantitative indicators of impairment?
Benihana Franchise · 2024 FDDAnswer from 2024 FDD Document
reign tax credits we do not expect to utilize as a result of generating income in a jurisdiction with a higher income tax rate than the U.S. The recording of deferred taxes requires significant management judgment regarding the interpretation of applicable statutes, the status of various income tax audits, and our particular facts and circumstances.
Our income taxes are impacted 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 subsidiaries in the U.K. and Italy.
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 undisco
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 when events or changes suggest that the assets' carrying value may not be fully recoverable. This evaluation typically occurs at the individual restaurant level, which Benihana believes is the lowest level for identifiable cash flows. Benihana primarily uses historical cash flows, along with other relevant facts and circumstances, to estimate future cash flows. These facts and circumstances include significant underperformance relative to historical or projected future operating results, significant changes in how the acquired assets are used or the overall business strategy, and significant negative trends in the industry or economy.
Benihana measures the recoverability of restaurant assets by comparing the carrying amount of an individual restaurant's assets to the estimated identifiable undiscounted future cash flows expected to be generated by those assets. This process involves the use of estimates and assumptions, which are subject to a high degree of judgment. If the carrying amount of a restaurant's assets exceeds its estimated undiscounted future cash flows, Benihana recognizes an impairment charge. This charge is equivalent to the amount by which the carrying amount of the asset exceeds its fair value, with the estimated fair value determined according to ASC 820, Fair Value Measurement.
For a prospective Benihana franchisee, understanding this process is crucial because it affects the valuation of restaurant assets and potential impairment charges. The FDD mentions that property and equipment, net of accumulated depreciation, and the operating lease right-of-use assets as of December 31, 2023, were $139.9 million and $95.1 million, respectively. It is important to note that the impairment evaluation relies heavily on management's estimates and assumptions about future cash flows, which can be subjective and influenced by economic conditions and operating performance. Franchisees should be aware that changes in these estimates could lead to impairment losses, affecting the financial performance of their restaurants.