When does Benihana review long-lived assets for impairment?
Benihana Franchise · 2024 FDDAnswer from 2024 FDD Document
, 2023, we had a valuation allowance of $0.6 million that relates to foreign 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 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. Property and equipment, net of accumulated depreciation and the operating lease
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 whenever events or changes in circumstances suggest that the carrying value of these assets may not be fully recoverable. These assets include property, equipment, and right-of-use assets for operating leases. The impairment evaluation is typically conducted at the individual restaurant level, as Benihana believes this is the most accurate way to identify cash flows.
Benihana uses historical cash flows and other relevant facts to estimate future cash flows when assessing recoverability. These facts can include significant underperformance compared to past or projected operating results, major changes in how the assets are used, shifts in overall business strategy, and significant negative trends in the industry or economy. The process involves comparing the carrying amount of a restaurant's assets to the estimated identifiable undiscounted future cash flows expected from those assets.
If the carrying amount exceeds the estimated future cash flows, Benihana recognizes an impairment charge. This charge is equal to the difference between the carrying amount of the asset and its fair value, with the fair value determined according to ASC 820, Fair Value Measurement. As of December 31, 2023, the net property and equipment were $139.9 million, and the operating lease right-of-use assets were $95.1 million. For the year ended December 31, 2022 and 2021, the Company did not identify any event or changes in circumstances that indicated that the carrying values of its restaurant assets were impaired.
For a prospective franchisee, this means that the value of Benihana's assets is regularly assessed, and if a restaurant is underperforming or facing adverse conditions, the company may recognize an impairment loss. This can affect the overall financial health of the company and potentially impact the franchisee's investment. It is important for franchisees to understand how Benihana assesses and manages its assets to ensure the long-term viability of their investment.