How did Checkers account for the recognition of 'favorable leasehold interests' and 'unfavorable leasehold interests' as part of the Out-of-Court Restructuring?
Checkers Franchise · 2025 FDDAnswer from 2025 FDD Document
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For the period January 3, 2023 to June 16, 2023 (Predecessor), the Company derecognized $0.3 million of "favorable leasehold interests" and $0.01 million of "unfavorable leasehold interests" for the termination of 1 favorable and 1 unfavorable leases with the offsetting charges in "franchise fees and other income."
As part of the Out-of-Court Restructuring, which was accounted for a business combination, the Company recognized "favorable leasehold interests" and "unfavorable leasehold interests" at fair value.
For the period from June 17, 2023 to January 1, 2024 (Successor), no "favorable leasehold interests" or "unfavorable leasehold interests" were derecognized as no associated leases were terminated.
Leasehold interests have definite lives and are amortized on a straight-line basis over the remaining lease term including any optional renewal periods that are likely to be exercised. The average amortization period for leasehold interests as of January 1, 2024 (Successor) was 11.1 years. The Company recognized amortization expense, net of
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 91)
What This Means (2025 FDD)
According to Checkers's 2025 Franchise Disclosure Document, the Out-of-Court Restructuring was treated as a business combination. As a result, Checkers recognized both "favorable leasehold interests" and "unfavorable leasehold interests" at their fair value. This means that the company reassessed the value of leases where it was either paying below-market rates (favorable) or above-market rates (unfavorable) and recorded these values on its financial statements.
For a prospective Checkers franchisee, this accounting treatment is important because it reflects how Checkers manages its lease obligations and assets. The recognition of these leasehold interests at fair value provides a more accurate picture of the company's financial health following the restructuring. It also affects how these assets are amortized over time. Leasehold interests have definite lives and are amortized on a straight-line basis over the remaining lease term including any optional renewal periods that are likely to be exercised. The average amortization period for leasehold interests as of January 1, 2024 (Successor) was 11.1 years.
It's worth noting that prior to January 4, 2022, Checkers accounted for these leasehold interests differently under ASC 842. Before this date, favorable and unfavorable leasehold interests for leases where Checkers was the lessee were reclassified as an adjustment to the "right-of-use assets, net." After the adoption of ASC 842, "favorable leasehold interest" and "unfavorable leasehold interest" are only recognized for leases where Checkers is a lessor as the off-market component of a lease where the Company is a lessee is recognized as part of the "right-of-use assets, net."
Understanding these accounting changes and the impact of the Out-of-Court Restructuring can give a potential franchisee greater insight into Checkers's financial management and long-term lease strategy. Reviewing the company's financial statements and related notes, such as Note 12, can provide further details on these leasehold interests and their impact on the company's financial performance.