What are some of the estimates, assumptions, and measurements with Level 2 and Level 3 unobservable inputs that Carls relies upon in its impairment analyses?
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 re franchising 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's impairment analyses involve several estimates, assumptions, and measurements that rely on Level 2 and Level 3 unobservable inputs. These 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. These inputs are used to evaluate the recoverability of assets and to estimate their fair value.
Carls estimates future cash flows based on several factors, including experience gained, intentions regarding refranchising or closing restaurants, recent and expected sales trends, internal plans, the time since a restaurant was opened or remodeled, the maturity of the market, and other relevant information. The company generally estimates the useful life of restaurants on owned property to be 20 to 40 years. For restaurants subject to leases, the estimated useful life ranges from the end of the current lease term to the end of the lease term, including any option periods.
It's important to note that if Carls's future cash flows or same-store sales do not meet or exceed forecasted levels, or if restaurant operating cost increases exceed forecasts and the company cannot recover these costs through price increases, the carrying value of certain restaurants may be unrecoverable. This could lead to additional impairment charges in the future, which could negatively impact the financial performance of Carls and potentially its franchisees. Prospective franchisees should carefully consider these factors and the potential risks associated with relying on these estimates and assumptions.