What significant assumptions does management make when determining whether events or changes in circumstances have occurred indicating that the carrying amounts of long-lived assets may not be recoverable for Benihana?
Benihana Franchise · 2024 FDDAnswer from 2024 FDD Document
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, management makes significant assumptions when determining if events or changes in circumstances indicate that the carrying amounts of long-lived assets may not be recoverable. These assets, including property, equipment, and right-of-use assets for operating leases, are reviewed for impairment when such events occur. The impairment evaluation is generally performed at the individual restaurant level, which Benihana believes is the lowest level of identifiable cash flows.
Benihana primarily relies on historical cash flows, along with other relevant facts and circumstances, to estimate future cash flows. These facts and circumstances include significant underperformance relative to historical or projected future operating results, significant changes in how the acquired assets are used or the strategy for the overall business, and significant negative industry or economic trends. The recoverability of restaurant assets is assessed 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, requiring a high degree of judgment from Benihana's management. If the carrying amount of a restaurant's assets exceeds its estimated undiscounted future cash flows, an impairment charge is recognized. The charge is equivalent to the amount by which the carrying amount of the asset exceeds its fair value, which is determined according to ASC 820, Fair Value Measurement. As a prospective franchisee, it's important to understand these assumptions, as they can significantly impact the reported financial performance of a Benihana restaurant.