How are estimated sublease rentals 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.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 91)
What This Means (2025 FDD)
According to Checkers' 2025 Franchise Disclosure Document, prior to January 4, 2022, Checkers recognized reserves for restaurant retirement costs resulting from closing or abandoning a restaurant. Upon such an event, Checkers would reserve all remaining contractual rent and property tax payments, net of actual or estimated sublease rentals.
The estimated sublease rentals were a key component in valuing these reserves. Checkers based these estimates on market conditions in the areas where the restaurants were located, as well as their past experiences with similar sites. This suggests that Checkers considered local economic factors and historical data to predict potential sublease income.
After January 4, 2022, Checkers adopted ASC 842, Leases, and reserves for restaurant retirement costs and sublease subsidies are captured as an adjustment to the right-of-use assets at the time of transition. The FDD states that Checkers assesses leases for impairment and no longer recognizes reserves for restaurant retirement and refranchising costs.