What are the two steps Browns Chicken uses to measure the recoverability of goodwill?
Browns_Chicken Franchise · 2025 FDDAnswer from 2025 FDD Document
Goodwill represents the excess of cost over the fair value of net assets acquired in business combinations. Goodwill and indefinite-lived intangible assets are not amortized but are reviewed at least annually for impairment and whenever there is an impairment indicator, using a fair-value based approach. The Company conducts its annual impairment evaluation in the fourth quarter of each year. No impairment was indicated for the years ended December 31, 2024 and 2023. The recoverability of goodwill is measured using a two-step process. Step one of the test compared the fair value of each reporting unit to its book value. Step two, which compares the book value of the goodwill to its implied fair value, was not necessary since there were no indicators of potential impairment from step one.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 42)
What This Means (2025 FDD)
According to Browns Chicken's 2025 Franchise Disclosure Document, the company uses a two-step process to measure the recoverability of goodwill. Goodwill, in this context, refers to the excess of cost over the fair value of net assets acquired during business combinations. Browns Chicken does not amortize goodwill and indefinite-lived intangible assets; instead, they review these assets at least annually for impairment using a fair-value based approach. The company conducts its annual impairment evaluation in the fourth quarter of each year.
The first step in assessing goodwill recoverability involves comparing the fair value of each reporting unit to its book value. If the fair value is less than the book value, it indicates potential impairment, and the company proceeds to the second step. However, according to the 2025 FDD, the second step was not necessary for the years ending December 31, 2024 and 2023, as there were no indicators of potential impairment from the initial step.
The second step, which is only performed if the first step indicates potential impairment, compares the book value of the goodwill to its implied fair value. If the book value exceeds the implied fair value, an impairment loss is recognized. This two-step process ensures that Browns Chicken regularly assesses the value of its goodwill and accounts for any potential losses in its financial statements. For a prospective franchisee, this indicates that Browns Chicken follows standard accounting practices to ensure the accuracy of its financial reporting.