What costs are primarily included in the Checkersrallys' reserves for restaurant retirement and refranchising costs?
Checkersrallys Franchise · 2025 FDDAnswer from 2025 FDD Document
-------------|----|------------------------------|----|---------------|----|-----------------|-----|----------|---|--------------------------| | For the year ended January 2, 2023 | S | 4.290 | $ | 8€ | S | - | S | (4.290) | S | 92 | | For the year ended January 3, 2022 | $ | 4.834 | $ | 375 | $ | (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).
(Tabular Dollars in Thousands, Except Share and per Share Data)
The ending reserve balance in prior years represents 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. These costs primarily include the non-cancelable rent payments due over the remainder of the contractual rent period at the cease-use date, net of estimated or actual sublease rental income, and estimates of the related contractual property taxes. The cash outlays for these costs have been estimated for various terms ranging from two years to ten years and are discounted at a credit-adjusted risk-free rate in the case of closed or undeveloped restaurants and are undiscounted in the case of sales of restaurants to franchisees. In certain instances, the properties are subleased or have the potential to be subleased for an amount less than the obligation relating to the contractual rent payments.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 91)
What This Means (2025 FDD)
According to Checkersrallys' 2025 Franchise Disclosure Document, the reserves for restaurant retirement and refranchising costs primarily include expenses related to restaurants that have been closed, were never developed, or were sold to a franchisee under specific sublease conditions. These reserves were initially recognized but are no longer actively maintained due to the adoption of ASC 842, Leases, and subsequent impairment assessments. The company had $4.3 million in reserves for restaurant retirement and refranchising costs at the time of transition in fiscal year 2022.
The costs covered by these reserves mainly consist of non-cancelable rent payments that are due over the remaining contractual rent period from the date of cease-use, after deducting any estimated or actual sublease rental income. Additionally, the reserves account for estimates of related contractual property taxes. These cash outlays are projected for periods ranging from two to ten years.
For closed or undeveloped restaurants, these costs are discounted at a credit-adjusted risk-free rate. However, in cases where restaurants are sold to franchisees, the costs are not discounted. If a property is subleased or has the potential to be subleased for an amount less than the original contractual rent payments, the initial reserve amount is reduced by the actual sublease income or an estimate based on local market conditions and Checkersrallys' experience with similar sites. The FDD states that all disposal and sale activities were completed in the periods when the expense was recognized, and the amounts recognized as expense represent the total costs estimated to be incurred.