How does Carls calculate the estimated liability for closed restaurants?

According to Carls's 2024 Franchise Disclosure Document, the estimated liability for closed restaurants is based on the future lease payments and other contractual obligations for the properties until the lease has been abated. The amount of the estimated liability established is the present value of these estimated future payments, minus the present value of estimated sublease income. The interest rate used to calculate the present value of these liabilities is based on an estimated credit-adjusted risk-free rate at the time the liability is established.

This means that when Carls closes a restaurant, they estimate how much they will owe in the future for lease payments and other contractual obligations related to the property. They then reduce this amount by any income they expect to receive from subleasing the property to another tenant. The resulting amount is the estimated liability for the closed restaurant. The interest rate used to discount these future payments to their present value reflects the risk associated with the payments.

For a prospective franchisee, this information is relevant because it provides insight into how Carls manages its financial obligations when a restaurant is closed. It also shows that Carls considers potential sublease income when calculating the liability, which could reduce the overall financial impact of a closure. The adoption of ASC 842 during fiscal year 2023 means that this estimated liability is now recorded as the entire operating lease liability in the Consolidated Balance Sheet, reflecting a change in accounting practices.