What are 'risk vehicles' in the context of Budget's financial statements?
Budget Franchise · 2025 FDDAnswer from 2025 FDD Document
The Company records rental vehicles at cost, net of accumulated depreciation. The initial cost of the vehicles is recorded net of incentives and allowances from manufacturers. Rental vehicles acquired by the Company outside of the manufacturer repurchase and guaranteed depreciation programs are referred to as risk vehicles and the carrying values of these risk vehicles are depreciated based upon the vehicles' estimated residual values at their expected dates of disposition. The estimation of residual values for risk vehicles requires the Company to make assumptions regarding factors which include, but are not limited to, the anticipated age of the vehicles and market conditions for used vehicles at the time of disposal. The Company regularly evaluates estimated residual values and adjusts vehicle depreciation rates as appropriate. Any adjustments to depreciation are made prospectively.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 79)
What This Means (2025 FDD)
According to Budget's 2025 Franchise Disclosure Document, 'risk vehicles' are rental vehicles that Budget acquires outside of manufacturer repurchase and guaranteed depreciation programs. The company records these vehicles at cost, minus accumulated depreciation, and net of incentives and allowances from manufacturers.
The valuation of these 'risk vehicles' is based on their estimated residual values at the expected time of disposal. This estimation requires Budget to make assumptions about factors such as the anticipated age of the vehicles and market conditions for used vehicles. These assumptions are inherently uncertain and require considerable judgment from Budget's management.
Because of the significant volume of risk vehicles in the United States and the estimation uncertainty involved, the FDD indicates that auditing the residual values of these vehicles and the related depreciation expense requires extensive audit effort. Auditors must develop independent expectations of residual values and depreciation expense, and a high degree of auditor judgment is necessary when performing audit procedures and evaluating the results. Adjustments to depreciation are made prospectively as Budget regularly evaluates estimated residual values and adjusts vehicle depreciation rates.