How does Carls determine the appropriate allowances associated with franchise and other receivables?

Our most significant areas of estimation are:

• estimation of future cash flows used to assess the recoverability of long-lived assets, including intangible assets, goodwill, finance lease assets and operating lease assets;
• estimation, using actuarially determined methods, of our self-insured claim losses under our workers' compensation, general liability and auto liability insurance programs;
• determination of appropriate estimated liabilities for loss contingencies;
• determination of appropriate assumptions to use in evaluating leases for finance versus operating lease treatment, establishing depreciable lives for leasehold improvements and establishing straight-line rent expense periods;
• estimation of the appropriate allowances associated with franchise and other receivables;
• determination of the appropriate assumptions to estimate gift card breakage;
• determination of the appropriate assumptions to estimate the fair value of share-based compensation; and
• estimation of our deferred income tax asset valuation allowance, liabilities related to uncertain tax positions and effective tax rate.

We record provisions for estimated losses on receivables when we believe our franchisees are unable to make their required payments. We cease accruing royalties and rent revenue from franchisees during the fiscal quarter in which we determine that collectibility of such amounts is not reasonably assured. There are a number of different actions we and/or our franchisees may take to resolve or mitigate franchise collection issues. These actions may include a reduction or deferral of future royalties, a reduction or deferral of future rent for which we are the landlord or the primary obligor to the landlord, invoking personal guarantees, or if necessary, acquiring the restaurants or terminating the franchise agreement.

Source: Item 21 — FINANCIAL STATEMENTS (FDD pages 79–80)