Does Carls record liabilities for losses that are reasonably possible but not probable?

According to Carls's 2024 Franchise Disclosure Document, Carls does not record liabilities for losses that are reasonably possible but not probable. The FDD states that Carls assesses loss contingencies to estimate the likelihood of loss and the range of possible settlements. Carls accrues loss contingencies that are deemed probable and for which the amount of expected loss is reasonably estimable. However, Carls does not record liabilities for losses that they believe are only reasonably possible to result in an adverse outcome.

This accounting practice means that Carls only recognizes a liability on their balance sheet when a loss is considered probable and the amount can be reasonably estimated. This is a common accounting approach, as it prevents companies from overstating liabilities for uncertain future events. However, it also means that potential franchisees may not see the full picture of possible financial risks in Carls's financial statements, as losses that are deemed reasonably possible but not probable are not included.

For a prospective Carls franchisee, this information is important because it highlights the need to conduct thorough due diligence and assess potential risks beyond what is presented in the financial statements. While Carls follows standard accounting practices, potential franchisees should consider seeking independent legal and financial advice to evaluate all potential liabilities and risks associated with investing in a Carls franchise. Understanding how Carls accounts for loss contingencies can help franchisees better assess the overall financial health and stability of the company.