When assessing the recoverability of long-lived assets, including intangible assets, finance lease assets, and operating lease assets, what does Carls use to estimate future cash flows?
Carls Franchise · 2024 FDDAnswer from 2024 FDD Document
Our impairment analyses rely upon a number of estimates, assumptions and measurements with significant Level 2 and Level 3 unobservable inputs (see Note 13), including estimates of future cash flows, assumptions of future same-store sales and projected operating expenses for each of our restaurants over their estimated remaining useful lives in order to evaluate recoverability and estimate fair value. Future cash flows are estimated based upon experience gained, current intentions about refranchising or closing restaurants, recent and expected sales trends, internal plans, the period of time since the restaurant was opened or remodeled, the maturity of the related market and other relevant information. We generally estimate the useful life of restaurants on owned property to be 20 to 40 years and estimate the useful life of restaurants subject to leases to range from the end of the lease term then in effect to the end of such lease term including option periods. If our future cash flows or same-store sales do not meet or exceed our forecasted levels, or if restaurant operating cost increases exceed our forecast and we are unable to recover such costs through price increases, the carrying value of certain of our restaurants may prove to be unrecoverable, and we may incur additional impairment charges in the future.
Source: Item 21 — FINANCIAL STATEMENTS (FDD pages 79–80)
What This Means (2024 FDD)
According to Carls's 2024 Franchise Disclosure Document, the company relies on several factors to estimate future cash flows when assessing the recoverability of long-lived assets. These assets include intangible assets, finance lease assets, and operating lease assets. Carls considers experience gained, current intentions regarding refranchising or closing restaurants, recent and expected sales trends, internal plans, the period since a restaurant was opened or remodeled, the maturity of the related market, and other relevant information.
Carls's impairment analyses involve various estimates, assumptions, and measurements, incorporating Level 2 and Level 3 unobservable inputs. These inputs include estimates of future cash flows, assumptions about future same-store sales, and projected operating expenses for each restaurant over their estimated remaining useful lives. The company uses these projections to evaluate the recoverability of assets and estimate their fair value.
Carls generally estimates the useful life of restaurants on owned property to be between 20 and 40 years. For restaurants subject to leases, the estimated useful life ranges from the end of the current lease term to the end of such lease term, including any option periods. This estimation is crucial for determining the depreciation and amortization schedules of these assets.
Prospective franchisees should be aware that these estimations are subject to change and can significantly impact the financial performance of a Carls franchise. If future cash flows or same-store sales do not meet forecasted levels, or if restaurant operating cost increases exceed forecasts without the ability to recover costs through price increases, the carrying value of certain restaurants may become unrecoverable, potentially leading to additional impairment charges in the future.