What accounting standard does Checkers follow when evaluating the recoverability of intangible assets with an indefinite life?
Checkers Franchise · 2025 FDDAnswer from 2025 FDD Document
Intangible assets not subject to amortization consist of the brands (tradenames) intangible assets. A quantitative impairment test performed on these intangible assets consists of a comparison of their fair value with their carrying value. The Company evaluates the recoverability of intangible assets with an indefinite life in accordance with ASC 350, Intangibles-Goodwill and Other. These assets are tested for impairment annually or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The authoritative guidance allows a company to perform a qualitative or a quantitative assessment of impairment. A company may first perform a qualitative assessment to determine whether it is necessary to perform the quantitative impairment test or it could also bypass the qualitative assessment and proceed directly to performing the quantitative impairment test.
If the carrying value of an intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. The estimates of fair value of intangible assets not subject to amortization are determined using the relief from royalty valuation methodology. Significant assumptions are inherent to this process, including estimates of future revenues generated by the related sales, the discount rate, and the royalty rate. Discount rate assumptions are based on an assessment of the risk inherent in the respective intangible assets. Royalty rate assumptions are based on projected profitability, actual franchisee agreements and comparable market rates.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 91)
What This Means (2025 FDD)
According to Checkers's 2025 Franchise Disclosure Document, the company evaluates the recoverability of intangible assets with an indefinite life, such as brand tradenames, in accordance with ASC 350, Intangibles-Goodwill and Other. These assets are assessed for impairment annually or when circumstances suggest the carrying amount may not be recoverable. Checkers has the option to perform either a qualitative or a quantitative assessment of impairment. The company can start with a qualitative assessment to determine if a quantitative test is necessary or proceed directly to the quantitative test.
If the carrying value of an intangible asset exceeds its fair value, Checkers recognizes an impairment loss equal to the excess amount. The fair value of intangible assets not subject to amortization is estimated using the relief from royalty valuation methodology. This process involves significant assumptions, including estimates of future revenues, discount rates, and royalty rates. Discount rate assumptions are based on an assessment of the risk inherent in the intangible assets, while royalty rate assumptions are based on projected profitability, actual franchisee agreements, and comparable market rates.
For a potential Checkers franchisee, this means that the value of the Checkers brand name, which is an intangible asset, is regularly reviewed to ensure it is not overstated on the company's balance sheet. The impairment testing can affect Checkers' financial statements, which could indirectly impact franchisee operations and financial health. Understanding these accounting practices can provide franchisees with insight into how Checkers manages and values its brand assets.