What is the significance of identifying potential indicators of impairment for Benihana's long-lived restaurant assets?
Benihana Franchise · 2024 FDDAnswer from 2024 FDD Document
We identified the determination of possible impairment indicators for long-lived assets as a critical audit matter because of the significant assumptions management makes when determining whether events or changes in circumstances have occurred indicating that the carrying amounts of long-lived assets may not be recoverable. This required a high degree of auditor judgement and an increased extent of effort when performing audit procedures to evaluate whether management appropriately identified impairment indicators.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the evaluation of long-lived asset impairment indicators included the following, among others:
- We tested the effectiveness of internal controls over the Company's long lived asset impairment indicator evaluation.
- We evaluated the reasonableness of the Company's evaluation of impairment indicators by:
- Testing long-lived restaurant assets for possible indications of impairment, including searching for 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 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, identifying potential impairment indicators for long-lived assets is a critical audit matter due to the significant assumptions management makes when determining whether events or changes in circumstances suggest that the carrying amounts of these assets may not be recoverable. This determination requires a high degree of auditor judgment to evaluate whether management has appropriately identified these indicators. Long-lived assets include property and equipment and right-of-use assets for operating leases.
The impairment evaluation is generally performed at the individual restaurant level, as Benihana believes this is the lowest level of identifiable cash flows. Recoverability of restaurant assets is measured by comparing the carrying amount of a restaurant's assets to the estimated undiscounted future cash flows expected to be generated by those assets. If the carrying amount exceeds the estimated future cash flows, an impairment charge is recognized for the difference between the carrying amount and the asset's fair value, determined in accordance with ASC 820, Fair Value Measurement.
For a prospective Benihana franchisee, understanding how these assets are valued and the potential for impairment is crucial. If a restaurant's performance declines, leading to an impairment charge, it could affect the restaurant's reported profitability and potentially impact the franchisee's investment. The FDD indicates that the auditor's procedures include testing the effectiveness of internal controls, evaluating the reasonableness of impairment indicators, and testing long-lived restaurant assets for possible indications of impairment, including searching for locations with current period losses or projected losses. This rigorous process aims to ensure that the financial statements accurately reflect the value of Benihana's assets.