How is the discount rate determined for Checkers' restaurant retirement cost reserves?
Checkers Franchise · 2025 FDDAnswer from 2025 FDD Document
in, the Company believes adequate amounts of tax, including interest and penalties, have been provided for any adjustments that are expected to result from those years.
(Tabular Dollars in Thousands, Except Share and per Share Data)
Reserves for Restaurant Retirement and Refranchising Costs
Prior to the adoption of ASC 842, Leases, on January 4, 2022, the Company recognized reserves for restaurant retirement costs, which generally result from the closing or abandoning of a restaurant, in accordance with the provisions of ASC 420, Exit or Disposal Cost Obligations. Upon the closing of a restaurant or the abandoning of a site, the Company would reserve all remaining contractual rent and property tax payments, net of actual or estimated sublease rentals. The significant inputs into the valuation of reserves for restaurant retirement costs included payments remaining under the lease terms, reduced by estimated or actual sublease rentals that could reasonably be obtained, discounted at a credit-adjusted risk-free rate. The estimated sublease rentals are based on market conditions in the areas where the restaurants are located and the Company's experience with previous sites. The discount rate is the risk-free rate adjusted for perceived risk in the projected cash flows, which is deemed low in the case of future rent payments.
The Company periodically subleases land and buildings in connection with the sale of Company-operated restaurants to franchisees. In certain cases, the terms of the sublease provide for rents from sublessees that are less than the rents the Company is obligated to pay under the original lease.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 91)
What This Means (2025 FDD)
According to Checkers's 2025 Franchise Disclosure Document, prior to January 4, 2022, the discount rate used for restaurant retirement cost reserves was a credit-adjusted risk-free rate. This rate was applied to the remaining contractual rent and property tax payments, net of any actual or estimated sublease rentals, when a restaurant was closed or abandoned. The risk-free rate was adjusted to account for the perceived risk associated with the projected cash flows, which Checkers deemed low due to the nature of future rent payments.
Checkers determined the estimated sublease rentals based on market conditions in the specific areas where the restaurants were located, as well as their past experiences with similar sites. This involved assessing the potential for subleasing the property and estimating the rental income that could be generated. The difference between the remaining lease obligations and the estimated sublease income, discounted at the credit-adjusted risk-free rate, formed the basis for the restaurant retirement cost reserve.
However, Checkers adopted ASC 842, Leases, in fiscal year 2022, and no longer recognizes reserves for restaurant retirement and refranchising costs. Subsequent to its adoption of ASC 842, the Company assesses leases for impairment. Therefore, there was no activity related to restaurant retirement or refranchising for the year ended January 1, 2024.