Under what circumstances does Carls assess its long-lived assets for impairment?
Carls Franchise · 2024 FDDAnswer from 2024 FDD Document
ng-lived assets for restaurants to be disposed of or held and used;
- (ii) store closure costs, including rent, taxes, depreciation and other costs incurred for closing a store; and
- (iii) gain or loss on the sale of restaurants, including refranchising transactions.
Considerable management judgment is necessary to estimate future cash flows, including cash flows from continuing use, terminal value, closure costs, expected sublease income and refranchising proceeds. Accordingly, actual results could vary significantly from our estimates.
(i) Impairment of Restaurant-Level Long-Lived Assets
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.
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 refranchising 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.
Source: Item 21 — FINANCIAL STATEMENTS (FDD pages 79–80)
What This Means (2024 FDD)
According to Carls's 2024 Franchise Disclosure Document, Carls evaluates restaurant-level long-lived assets for impairment whenever events or circumstances suggest that the carrying value of those assets may be impaired. This evaluation is triggered by indicators such as sequential annual cash flow losses or adverse changes in the physical condition or expected use of the asset group. For impairment testing, assets are grouped at the individual restaurant level, including fixed assets, finance lease assets, and operating lease assets, as this is the lowest level for which identifiable cash flows are largely independent.
If these indicators exist, Carls assesses whether the assets are recoverable by comparing the undiscounted future cash flows expected from their use and disposal to their carrying value. Assets not deemed recoverable 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 such assets in an orderly transaction between market participants.
Carls's impairment analyses rely on various estimates, assumptions, and measurements, including estimates of future cash flows, assumptions of future same-store sales, and projected operating expenses for each restaurant over their estimated remaining useful lives. These estimates are based on experience, intentions regarding refranchising or closing restaurants, recent and expected sales trends, internal plans, the time since the restaurant was opened or remodeled, the maturity of the market, and other relevant information. The useful life of restaurants on owned property is generally estimated to be 20 to 40 years, while for restaurants subject to leases, it ranges from the end of the current lease term to the end of such term including option periods.
It's important to note that if future cash flows or same-store sales do not meet or exceed forecasted levels, or if restaurant operating cost increases exceed forecasts and cannot be recovered through price increases, the carrying value of certain restaurants may prove unrecoverable. This could lead to additional impairment charges in the future, which would negatively impact the franchisee's financial performance. Therefore, understanding the assumptions and estimates used in these impairment analyses is crucial for prospective franchisees.