Why was there no activity related to restaurant retirement or refranchising for Checkers for the year ended January 1, 2024?
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).
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 91)
What This Means (2025 FDD)
According to Checkers's 2025 Franchise Disclosure Document, there was no activity related to restaurant retirement or refranchising for the year ended January 1, 2024, due to the company's adoption of 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 adopting ASC 842, Checkers assesses leases for impairment and no longer recognizes reserves for restaurant retirement and refranchising costs.
This change in accounting practices means that Checkers no longer sets aside specific reserves for the costs associated with closing restaurants or refranchising them to new owners. Instead, the company evaluates its leases for potential impairment, which is a different method of accounting for these types of costs. The prior reserve balance represented 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.
For a prospective franchisee, this accounting change could mean less transparency regarding potential restaurant closures or refranchising activities. While the company's financial statements may not explicitly show reserves for these activities, the costs associated with restaurant retirement or refranchising still exist and could impact the company's overall financial performance. Franchisees may want to inquire about the company's criteria for assessing lease impairments and how these assessments could affect the franchise system.
It's important for potential franchisees to understand how accounting standards can impact a franchisor's financial reporting and to ask questions about any changes in accounting practices that could affect the franchise system's stability and growth.