What assumptions made by Budget's management were evaluated by auditors?
Budget Franchise · 2025 FDDAnswer from 2025 FDD Document
the vehicles. The test was performed as of November 30, 2024. The Company used a market approach to determine the fair value of the impacted vehicles, utilizing prices for similar assets in active markets (Level 2). During the year ended December 31, 2024, the Company recorded a non-cash impairment charge.
Given the volume of vehicles in the United States and the significant assumptions made by management to evaluate vehicles for impairment, we performed audit procedures to (1) evaluate whether management appropriately identified events or changes in circumstances indicating that the carrying amounts of vehicle assets may not be recoverable; (2) evaluate management's determination of asset groups at the lowest level of identifiable cash flows; (3) evaluate management's recoverability test by comparing the sum of undiscounted cash flows expected to result from the use and eventual disposition of the impacted vehicles to their carrying value and, when applicable, (4) evaluate the fair value estimates for the impacted vehicles. Those procedures required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists and other professionals in our firm with expertise in long-lived asset impairment.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to impairment of long-lived assets of United States vehicles included the following, among others:
- We tested the effectiveness of controls over (1) management's identification of events or changes in circumstances that indicate that the carrying amount of vehicles may not be recoverable, including management's review of forecasted future cash flows, and (2) management's review of the methodology in determining the fair value estimate of vehicles.
- We evaluated whether management appropriately identified events or changes in circumstances that indicated that the carrying amounts of vehicle assets may not be recoverable.
- We evaluated management's determination of asset groups at the lowest level of identifiable cash flows.
- We tested management's recoverability test by comparing the sum of undiscounted cash flows expected to result from the use and eventual disposition of the impacted vehicles to their carrying value by performing the following:
- Tested the mathematical accuracy of management's analysis.
- Compared relevant information to historical data.
- Assessed management's assumptions used when determining the expected rental revenue, operating expenses and residual values expected at the time of disposition of vehicles as part of their recoverability test.
- We tested the fair value estimates for the impacted vehicles.
- With the assistance of our fair value specialists, we evaluated the reasonableness of the valuation methodology applied and fair value determined for vehicles by testing the methodology applied and measurable inputs used, and the mathematical accuracy of the calculation.
/s/ DELOITTE & TOUCHE LLP New York, New York February 14, 2025
We have served as the Company's auditor since 1997.
Avis Budget Group, Inc. CONSOLIDATED STATEMENTS OF OPERATIONS (In millions, except per share data)
| Y | 11, | |||
|---|---|---|---|---|
| 2024 | 2023 | 2022 | ||
| Revenues | $ | 11,789 | $ 12,008 | $ 11,994 |
| Expenses | ||||
| Operating | 6,014 | 5,675 | 5,285 | |
| Vehicle depreciation and lease charges, net | 2,976 | 1,739 | 828 | |
| Selling, general and administrative | 1,352 | 1,408 | 1,348 | |
| Vehicle interest, net | 941 | 736 | 402 | |
| Non-vehicle related depreciation and amortization | 237 | 216 | 225 | |
| Interest expense related to corporate debt, net: | ||||
| Interest expense | 358 | 296 | 250 | |
| Early extinguishment of debt | 19 | 5 | _ | |
| Long-lived asset impairment and other related charges | 2,470 | _ | ||
| Restructuring and other related charges | 37 | 11 | 19 | |
| Transaction-related costs, net | 3 | 5 | 8 | |
| Other (income) expense, net | 9 | 3 | (7) | |
| Total expenses | 14,416 | 10,094 | 8,358 | |
| Income (loss) before income taxes | (2,627) | 1,914 | 3,636 | |
| Provision for (benefit from) income taxes | (810) | 279 | 880 | |
| Net income (loss) | (1,817) | 1,635 | 2,756 | |
| Less: Net income (loss) attributable to non-controlling interests | 3 | (8) | ||
| Net income (loss) attributable to Avis Budget Group, Inc. | $ | (1,821) | $ 1,632 | $ 2,764 |
| Technoome (1855) attributable to Avis Budget Group, Inc. | * | (1,021) | 1,002 | 2,104 |
| Earnings (loss) per share | ||||
| Basic | $ | (51.23) | $ 42.57 | $ 58,41 |
| Diluted | $ | (51.23) | $ 42.08 | $ 57.16 |
Avis Budget Group, Inc. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In millions)
| Year Ended December 31, | ||||
|---|---|---|---|---|
| 2024 | 2023 | 2022 | ||
| Net income (loss) | $ | (1,817) $ | 1,635 | $ 2,756 |
| Less: Net income (loss) attributable to non-controlling interests | 4 | 3 | (8) | |
| Net income (loss) attributable to Avis Budget Group, Inc. |
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 79)
What This Means (2025 FDD)
According to Budget's 2025 Franchise Disclosure Document, the auditors evaluated several assumptions made by management. One key area involved the impairment of long-lived assets, specifically United States vehicles. Auditors assessed whether Budget's management appropriately identified events or changes indicating that the carrying amounts of vehicle assets might not be recoverable. They also scrutinized management's determination of asset groups at the lowest level of identifiable cash flows. The auditors tested Budget's recoverability test by comparing the sum of undiscounted cash flows expected from the use and disposition of the vehicles to their carrying value, and evaluated the fair value estimates for the impacted vehicles. This process involved assessing assumptions related to expected rental revenue, operating expenses, and residual values at the time of disposition.
Another critical area of focus was the estimation of residual values for United States risk vehicles and related vehicle depreciation expense. Given the volume of risk vehicles, auditors paid close attention to the assumptions regarding the impact of future consumer demand and general economic conditions on used vehicle pricing. The auditors evaluated the appropriateness and consistency of Budget's methods, significant assumptions, and judgments in calculating the estimated residual values of risk vehicles and their expected disposition dates. They also tested the effectiveness of controls over vehicle depreciation expense related to risk vehicles and management's review of the significant assumptions and judgments used to calculate the estimated residual values.
Additionally, the auditors reviewed Budget's self-insurance reserves for public liability and property damage claims in the United States. These reserves represent estimates for reported claims not yet paid and claims incurred but not yet reported. The auditors tested the effectiveness of controls over management's review of significant assumptions, key inputs, and methods used to calculate the estimate of these claims. They also tested the underlying data, including historical claims, to assess the reasonableness of the inputs to the actuarial estimate. The auditors compared prior-year assumptions of expected development and ultimate loss to actuals incurred during the current year to identify potential bias in the determination of these liabilities.
For a prospective Budget franchisee, this indicates that the financial health and reporting of Budget are subject to rigorous scrutiny. The focus on vehicle valuation and depreciation, as well as self-insurance reserves, highlights areas where assumptions and estimates have a significant impact on the financial statements. Understanding these critical audit matters can provide franchisees with greater confidence in the financial stability and transparency of the Budget franchise system.