What is the role of management's assumptions in determining whether Benihana's long-lived assets may not be recoverable?

According to Benihana's 2024 Franchise Disclosure Document, management's assumptions play a critical role in determining whether the carrying amounts of long-lived assets, such as property, equipment, and right-of-use assets for operating leases, may not be recoverable. The determination of possible impairment indicators for long-lived assets is considered a critical audit matter because of the significant assumptions management makes when determining whether events or changes in circumstances have occurred that indicate the carrying amounts of long-lived assets may not be recoverable. This process requires a high degree of auditor judgment to evaluate whether management appropriately identified impairment indicators.

Benihana 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. The impairment evaluation is generally performed at the individual restaurant level. Recoverability of restaurant assets is measured by comparing the carrying amount of an individual restaurant's assets to the estimated undiscounted future cash flows expected to be generated by those restaurant assets. If the carrying amount exceeds the estimated future cash flows, an impairment charge is recognized.

Management's assumptions about future cash flows, operating results, changes in asset use, business strategies, and industry or economic trends are crucial in this evaluation. For example, decisions to close or dispose of restaurants are based on operating performance or strategic considerations, requiring management to estimate outcomes like the sale of a leasehold or lease buyout. The accuracy of these estimates can vary materially, and management regularly monitors the adequacy of provisions until final disposition occurs. Therefore, a franchisee should consider that the brand's financial statements and asset valuations are subject to management's judgment and assumptions about future performance.