What were the cash outlays related to Checkers' reserves for restaurant retirement and refranchising costs for the year ended January 3, 2022?
Checkers Franchise · 2025 FDDAnswer from 2025 FDD Document
------|----|------------------------------|----|---------------|----|-----------------|-----|----------|---|--------------------------| | For the year ended January 2, 2023 | S | 4.290 | $ | - | S | - | S | (4.290) | S | - | | For the year ended January 3, 2022 | S | 4.834 | S | 375 | S | (1.842) | S | 923 | S | 4.290 |
The Company adopted ASC 842, Leases, in fiscal year 2022 and at the time of transition the $4.3 million in reserves for restaurant retirement and refranchising costs were included as a reduction to "operating right-of-use assets, net." Subsequent to its adoption of ASC 842, the Company assesses leases for impairment and no longer recognizes reserves for restaurant retirement and refranchising costs. Accordingly, there was no activity related to restaurant retirement or refranchising for the year ended January 1, 2024 in either the Predecessor or Successor periods. (See Note 16. Leases).
(Tabular Dollars in Thousands, Except Share and per Share Data)
The ending reserve balance in prior years represents estimates for the ongoing costs of certain restaurants that have been closed, were never developed or were sold to a franchisee that are subject to an estimated or actual sublease with rents that are less than the rents the Company is obligated to pay under the original lease and are not otherwise reflected within the favorable or unfavorable leasehold interests balances, or that contain other provisions that require the recognition of the reserve. These costs primarily include the non-cancelable rent payments due over the remainder of the contractual rent period at the cease-use date, net of estimated or actual sublease rental income, and estimates of the related contractual property taxes. The cash outlays for these costs have been estimated for various terms ranging from two years to ten years and are discounted at a credit-adjusted riskfree rate in the case of closed or undeveloped restaurants and are undiscounted in the case of sales of restaurants to franchisees. In certain instances, the properties are subleased or have the potential to be subleased for an amount less than the obligation relating to the contractual rent payments.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 91)
What This Means (2025 FDD)
According to Checkers' 2025 Franchise Disclosure Document, the company adopted ASC 842, Leases, in fiscal year 2022. At the time of transition, the $4.3 million in reserves for restaurant retirement and refranchising costs were included as a reduction to "operating right-of-use assets, net." Subsequent to its adoption of ASC 842, Checkers assesses leases for impairment and no longer recognizes reserves for restaurant retirement and refranchising costs. The document states that there was no activity related to restaurant retirement or refranchising for the year ended January 1, 2024 in either the Predecessor or Successor periods.
Prior to adopting ASC 842, Checkers estimated the cash outlays for these costs for terms ranging from two to ten years, discounted at a credit-adjusted risk-free rate for closed or undeveloped restaurants, and undiscounted for sales of restaurants to franchisees. These reserves covered costs primarily including non-cancelable rent payments due over the remainder of the contractual rent period at the cease-use date, net of estimated or actual sublease rental income, and estimates of the related contractual property taxes.
For a potential Checkers franchisee, this change in accounting standards means that the company's financial statements for periods before and after fiscal year 2022 are not directly comparable regarding restaurant retirement and refranchising costs. The adoption of ASC 842 significantly altered how these costs are recognized and reported. Franchisees should be aware of this change when reviewing Checkers' financial performance and consider how lease impairments are now assessed instead of relying on the previous reserve system.