Under what accounting standard does Checkers evaluate 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 in accordance with ASC 350, Intangibles-Goodwill and Other. These assets, which consist of the brands (tradenames), are tested for impairment annually or when events or changes in circumstances suggest that the carrying amount may not be recoverable.
Checkers can perform either a qualitative or quantitative assessment of impairment. The qualitative assessment determines whether performing a quantitative impairment test is necessary. However, Checkers can bypass the qualitative assessment and proceed directly to the quantitative test. If the carrying value of an intangible asset exceeds its fair value, an impairment loss is recognized equal to the excess amount.
The fair value of intangible assets not subject to amortization is estimated using the relief from royalty valuation methodology, which involves significant assumptions such as future revenues, discount rates, and royalty rates. Discount rate assumptions are based on the risk inherent in the intangible assets, while royalty rate assumptions are based on projected profitability, franchisee agreements, and comparable market rates. This evaluation process is crucial for Checkers to accurately reflect the value of its intangible assets on its financial statements.