What did the audit procedures evaluate regarding Budget's determination of asset groups?
Budget Franchise · 2025 FDDAnswer from 2025 FDD Document
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.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 79)
What This Means (2025 FDD)
According to Budget's 2025 Franchise Disclosure Document, the audit procedures evaluated management's determination of asset groups at the lowest level of identifiable cash flows. This evaluation was part of a broader assessment related to the impairment of long-lived assets, specifically concerning Budget's United States vehicle fleet. The audit aimed to ensure that Budget appropriately identified events or changes in circumstances that could indicate that the carrying amounts of vehicle assets were not recoverable.
In practical terms, this means the auditors scrutinized how Budget grouped its vehicle assets for impairment testing purposes. They checked whether these groupings were made at the lowest level where cash flows could be independently identified. This is important because it affects how Budget determines whether the value of its vehicle assets has declined and whether an impairment charge needs to be recorded. Accurate asset grouping is essential for fair financial reporting.
For a prospective Budget franchisee, this indicates that the company's financial statements have been rigorously audited concerning asset valuation and impairment. The audit procedures included evaluating the reasonableness of the asset groupings used by Budget, which provides a level of assurance that Budget's financial reporting is reliable. This aspect of the audit is particularly critical given the large volume of vehicles and the significant assumptions involved in assessing their value and potential impairment.
The audit also involved fair value specialists and other professionals with expertise in long-lived asset impairment, highlighting the complexity and judgment required in this area. The audit procedures included testing the effectiveness of controls over 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.