What are some examples of indicators of impairment that Carls looks for when evaluating restaurant-level assets?
Carls Franchise · 2024 FDDAnswer from 2024 FDD Document
Whenever events or circumstances indicate that the carrying value of assets may be impaired, we evaluate our restaurant-level long-lived assets for impairment. For purposes of impairment testing, assets are grouped at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities, which is generally the individual restaurant level for fixed assets, finance lease assets and operating lease assets. For each asset group, we evaluate whether there are indicators of impairment such as sequential annual cash flow losses or adverse changes in the physical condition or expected use of the asset group. When indicators of impairment exist, we evaluate whether the assets are recoverable by comparing the undiscounted future cash flows that we expect to generate from their use and disposal to their carrying value. Restaurant-level assets that are not deemed to be recoverable are written down to their estimated fair value, which is determined by assessing the highest and best use of the assets and the amounts that would be received for such assets in an orderly transaction between market participants.
Source: Item 21 — FINANCIAL STATEMENTS (FDD pages 79–80)
What This Means (2024 FDD)
According to Carls's 2024 Franchise Disclosure Document, the company evaluates restaurant-level long-lived assets for impairment whenever events or circumstances suggest that the carrying value of these assets may be impaired. For impairment testing, assets are grouped at the individual restaurant level for fixed assets, finance lease assets, and operating lease assets, as this is the lowest level where cash flows are largely independent.
Carls looks for specific indicators of impairment for each asset group. These indicators include sequential annual cash flow losses, which means the restaurant has been consistently losing money year after year. Another indicator is adverse changes in the physical condition of the restaurant, such as significant damage or disrepair. Additionally, Carls considers adverse changes in the expected use of the asset group, which could involve a change in business strategy or market conditions that negatively impacts the restaurant's performance.
When these indicators are present, Carls assesses whether the assets are recoverable by comparing the undiscounted future cash flows expected from their use and disposal to their carrying value. If the restaurant-level assets are not deemed recoverable, they are written down to their estimated fair value. This fair value is determined by assessing the highest and best use of the assets and the amounts that would be received for them in an orderly transaction between market participants. This process helps Carls ensure that the value of its assets on its financial statements accurately reflects their current worth and potential for future profitability.