What are the reporting units that Carls considers when testing goodwill for impairment?
Carls Franchise · 2024 FDDAnswer from 2024 FDD Document
Goodwill represents the excess, if any, of the purchase price over the fair value of identifiable net assets acquired in an acquisition. As of January 31, 2024, our goodwill balance primarily consisted of goodwill recorded in connection with the acquisition of CKE Inc., the Company's sole stockholder, that occurred on December 24, 2013. Goodwill may also be recorded in connection with the acquisition of restaurants from franchisees.
We test goodwill for impairment on an annual basis, or more frequently if events and/or circumstances indicate that goodwill might be impaired. The impairment test is performed at the reporting unit level, and an impairment loss is recognized to the extent that the carrying amount of the reporting unit exceeds its fair value. We consider our reporting units to be company-operated restaurants, domestic franchised restaurants and international franchised restaurants as the components (e.g., restaurants) within each reporting unit have similar economic characteristics, including products and services, production processes, types or classes of customers and distribution methods.
Source: Item 21 — FINANCIAL STATEMENTS (FDD pages 79–80)
What This Means (2024 FDD)
According to Carls's 2024 Franchise Disclosure Document, when testing goodwill for impairment, Carls considers three reporting units. These are company-operated restaurants, domestic franchised restaurants, and international franchised restaurants. The company believes that the components within each reporting unit, such as the restaurants themselves, possess similar economic characteristics. These include similar products and services, production processes, types or classes of customers, and distribution methods.
Goodwill, as defined in the FDD, represents the excess of the purchase price over the fair value of identifiable net assets acquired in an acquisition. As of January 31, 2024, the goodwill balance primarily consisted of goodwill recorded from the acquisition of CKE Inc., the Company's sole stockholder, on December 24, 2013. Goodwill may also be recorded when Carls acquires restaurants from its franchisees.
Carls tests goodwill for impairment annually, or more frequently if events or circumstances suggest that the goodwill might be impaired. The impairment test is conducted at the reporting unit level. If the carrying amount of goodwill exceeds its implied fair value, an impairment loss is recognized. This loss is equivalent to the excess of the carrying amount over the fair value of the reporting unit.