Does Carls measure non-financial long-lived assets at fair value on a recurring basis?
Carls Franchise · 2024 FDDAnswer from 2024 FDD Document
Our non-financial long-lived assets, including goodwill, intangible assets and property and equipment, are reported at carrying value and are not required to be measured at fair value on a recurring basis. However, on a periodic basis, or whenever events or changes in circumstances indicate that their carrying value may not be recoverable, we assess our long-lived assets for impairment. When impairment has occurred, such long-lived assets are written down to fair value. See Note 16 for further information regarding impairment charges.
Source: Item 21 — FINANCIAL STATEMENTS (FDD pages 79–80)
What This Means (2024 FDD)
According to Carls's 2024 Franchise Disclosure Document, the company does not measure its non-financial long-lived assets at fair value on a recurring basis. These assets, which include items like goodwill, intangible assets, and property and equipment, are instead reported at their carrying value. This means that Carls generally records these assets at their historical cost, less any accumulated depreciation or amortization.
However, Carls does assess these long-lived assets for impairment on a periodic basis, or whenever events or changes in circumstances suggest that the carrying value may not be recoverable. This is a standard accounting practice to ensure that assets are not overstated on the company's balance sheet. If impairment is indicated, the assets are then written down to their estimated fair value. This fair value determination involves estimating the exchange price that would be received for the asset in an orderly transaction between market participants.
Carls's impairment analyses rely on several estimates, assumptions, and measurements, including future cash flows, same-store sales, and operating expenses. These analyses often involve significant Level 2 and Level 3 unobservable inputs, which require considerable judgment and can impact the estimated fair value. If future cash flows or sales do not meet forecasted levels, or if operating costs increase beyond expectations, additional impairment charges may be incurred in the future. This could affect the profitability and financial position of Carls and its franchisees.
For a prospective franchisee, this means that while the initial accounting for long-lived assets is based on historical cost, the potential for impairment exists and could impact the financial statements. Understanding the assumptions and estimates used in impairment analyses is crucial for assessing the financial health and stability of a Carls franchise. Franchisees should inquire about the factors that could trigger impairment and how these are evaluated by Carls.