What assumptions used when determining the expected rental revenue, operating expenses and residual values expected at the time of disposition were assessed by Budget's management?
Budget Franchise · 2025 FDDAnswer from 2025 FDD Document
ue 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.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 79)
What This Means (2025 FDD)
According to Budget's 2025 Franchise Disclosure Document, the company's management makes assumptions about several factors when determining the expected rental revenue, operating expenses, and residual values of vehicles at the time of disposition. These assumptions are used as part of a recoverability test for the vehicles. The audit procedures include assessing these assumptions to ensure the financial statements are accurate.
Specifically, the estimation of residual values requires Budget to make assumptions regarding the age and mileage of the car at the time of disposal, as well as expected used vehicle auction market conditions. These assumptions are critical because Budget depreciates vehicles based on their estimated residual values at their expected dates of disposition, considering anticipated conditions in the used car market. Any adjustments to depreciation are made prospectively, and differences between actual residual values and estimated ones result in a gain or loss on disposal, recorded as part of vehicle depreciation at the time of sale.
Furthermore, the audit of Budget's financial statements involves evaluating the reasonableness of these estimated residual values. Auditors develop an independent expectation of residual values by referencing third-party data, information produced by the company, subsequent vehicle sales, and inquiries of management. They also test the underlying historical data and the mathematical accuracy of the company's calculations. This rigorous process ensures that the assumptions used by management are well-supported and that the financial reporting is reliable.
For a prospective franchisee, understanding these assumptions and how they impact vehicle depreciation is crucial. Since vehicle depreciation directly affects the profitability of a Budget franchise, it would be prudent to inquire about the specific methodologies and data sources used to forecast residual values and market conditions. This knowledge can help in making informed decisions about fleet management and financial planning.