How did Checkersrallys account for the Out-of-Court Restructuring regarding favorable and unfavorable leasehold interests?
Checkersrallys Franchise · 2025 FDDAnswer from 2025 FDD Document
ther income."
For the period January 3, 2023 to June 16, 2023 (Predecessor), the Company derecognized $0.3 million of "favorable leasehold interests" and $0.01 million of "unfavorable leasehold interests" for the termination of 1 favorable and 1 unfavorable leases with the offsetting charges in "franchise fees and other income."
As part of the Out-of-Court Restructuring, which was accounted for a business combination, the Company recognized "favorable leasehold interests" and "unfavorable leasehold interests" at fair value.
For the period from June 17, 2023 to January 1, 2024 (Successor), no "favorable leasehold interests" or "unfavorable leasehold interests" were derecognized as no associated leases were terminated.
Leasehold interests have definite lives and are amortized on a straight-line basis over the remaining lease term including any optional renewal periods that are likely to be exercised. The average amortization period for leasehold interests as of January 1, 2024 (Successor) was 11.1 years.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 91)
What This Means (2025 FDD)
According to Checkersrallys's 2025 Franchise Disclosure Document, the Out-of-Court Restructuring was treated as a business combination for accounting purposes. As part of this restructuring, Checkersrallys recognized both "favorable leasehold interests" and "unfavorable leasehold interests" at their fair value. This means that the company reassessed the value of leases where it acts as a lessor, and these values were then recorded on the company's books. Note 12 of the FDD provides further details on this accounting treatment.
For a prospective Checkersrallys franchisee, this accounting treatment is important because it affects the company's financial statements, which are used to assess the financial health and stability of the franchisor. Understanding how Checkersrallys accounts for its leasehold interests can provide insight into the company's overall financial strategy and risk management practices. Leasehold interests have definite lives and are amortized on a straight-line basis over the remaining lease term including any optional renewal periods that are likely to be exercised. As of January 1, 2024, the average amortization period for leasehold interests was 11.1 years.
It's worth noting that the accounting for leasehold interests can be complex and is subject to specific accounting standards (U.S. GAAP and ASC 805). The fair valuation of these interests requires making estimates and assumptions, which can impact the reported amounts in the financial statements. Franchisees should be aware of these complexities and consider seeking professional financial advice to fully understand the implications. For the period from June 17, 2023 to January 1, 2024 (Successor), no "favorable leasehold interests" or "unfavorable leasehold interests" were derecognized as no associated leases were terminated.
In connection with the Out-of-Court Restructuring, the fair value of favorable and unfavorable leasehold interests, where the Company is a lessor, were re-assessed and recognized as favorable and unfavorable leasehold interests. See Note 12.