What criteria does Carls use to determine when to accrue loss contingencies?
Carls Franchise · 2024 FDDAnswer from 2024 FDD Document
We routinely assess loss contingencies to develop estimates of likelihood of loss and range of possible settlement. We accrue those loss contingencies that are deemed to be probable, and for which the amount of expected loss is reasonably estimable. We do not record liabilities for losses we believe are only reasonably possible to result in an adverse outcome.
Source: Item 21 — FINANCIAL STATEMENTS (FDD pages 79–80)
What This Means (2024 FDD)
According to Carls's 2024 Franchise Disclosure Document, Carls accrues loss contingencies when two conditions are met. First, the loss contingency must be deemed probable. Second, the amount of the expected loss must be reasonably estimable. If Carls believes a loss is only reasonably possible, they do not record liabilities for it.
Carls routinely assesses loss contingencies to estimate the likelihood of loss and the range of possible settlements. This assessment is part of their regular financial review process. The FDD also mentions that litigation is inherently unpredictable, making the assessment of contingencies highly subjective and requiring judgment about future events.
For a prospective franchisee, this means that Carls aims to account for potential losses from lawsuits, claims, or other issues by setting aside reserves when a loss is likely and can be reasonably estimated. However, due to the subjective nature of these estimations, the actual losses may differ from the estimated amounts. Franchisees should be aware that Carls's financial statements reflect these estimates, which can impact the company's reported financial health.