How does Benihana measure the recoverability of its restaurant assets when assessing potential impairment?
Benihana Franchise · 2024 FDDAnswer from 2024 FDD Document
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, 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 reviews long-lived assets, such as property, equipment, and right-of-use assets for operating leases, for impairment whenever events or changes in circumstances suggest that the carrying value of these assets may not be fully recoverable. Benihana typically conducts this evaluation at the individual restaurant level, considering it the lowest level for identifiable cash flows. The company primarily relies on historical cash flows, along with other relevant facts and circumstances, to estimate future cash flows. These factors include significant underperformance relative to historical or projected future operating results, changes in asset use or overall business strategy, and negative industry or economic trends.
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. The charge is equivalent to the amount by which the carrying amount of the asset exceeds its fair value, with the estimated fair value determined in accordance with ASC 820, Fair Value Measurement.
For a prospective franchisee, this means that Benihana assesses the financial health of each restaurant location individually. If a location is underperforming or if there are significant negative economic factors, Benihana may write down the value of the assets at that location. This accounting practice can affect the overall financial statements of the company, but it also reflects Benihana's approach to managing and valuing its assets on a store-by-store basis. Benihana's impairment evaluation relies heavily on the accuracy of its cash flow projections and the judgment of its management team.