How is the reasonableness of management's undiscounted future cash flows analysis evaluated for Benihana?
Benihana Franchise · 2024 FDDAnswer from 2024 FDD Document
Our audit procedures related to impairment of long-lived assets included the following, among others:
- We tested the effectiveness of internal controls over the Company's long lived asset impairment indicator evaluation and undiscounted future cash flow analysis.
- We evaluated the Company's evaluation of impairment indicators by:
- Testing long-lived restaurant assets for indications of impairment, including evaluating locations with current period losses or projected losses
- Performing inquiries of management regarding the process and assumptions used to identify potential indicators of impairment and evaluating the consistency of the assumptions with evidence obtained in other areas of the audit.
- Inspecting minutes of the board of directors, the Company's public statements, operating plans, and industry data to identify any evidence that may contradict management's assumptions.
- We evaluated the reasonableness of management's undiscounted future cash flows analysis by comparing management's projections to (1) the Company's historical results, (2) internal communications to management and the Board of Directors, (3) external communications made publicly by management, and (4) industry data.
- We tested the completeness and accuracy of the underlying source information used by management to identify quantitative indicators of impairment.
Source: Item 22 — CONTRACTS (FDD pages 73–74)
What This Means (2024 FDD)
According to Benihana's 2024 Franchise Disclosure Document, the reasonableness of management's undiscounted future cash flows analysis is evaluated by comparing management's projections to several benchmarks. These include the company's historical results, internal communications to management and the Board of Directors, external communications made publicly by management, and industry data. This multifaceted comparison helps ensure that the projections are grounded in both internal expectations and external realities.
This evaluation is part of a broader audit procedure related to the impairment of long-lived assets. The audit procedures also include testing the effectiveness of internal controls over the company's long-lived asset impairment indicator evaluation and undiscounted future cash flow analysis. Additionally, the company's evaluation of impairment indicators is assessed by testing long-lived restaurant assets for indications of impairment, including evaluating locations with current period losses or projected losses. Inquiries of management are conducted regarding the processes and assumptions used to identify potential indicators of impairment, and the consistency of these assumptions is evaluated against evidence obtained in other areas of the audit.
Furthermore, the minutes of the board of directors, the company's public statements, operating plans, and industry data are inspected to identify any evidence that may contradict management's assumptions. The completeness and accuracy of the underlying source information used by management to identify quantitative indicators of impairment are also tested. These steps collectively provide a rigorous review of the assumptions and data used in assessing potential impairments, offering a more reliable basis for financial reporting.
For a prospective Benihana franchisee, this detailed audit process indicates a thorough approach to financial assessments, which can provide some assurance regarding the financial health and stability of the brand. It also highlights the importance of accurate financial projections and consistent communication within the company, as these are key factors in evaluating potential asset impairments.