What costs did Checkersrallys reserve upon closing or abandoning a restaurant site?
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's 2025 Franchise Disclosure Document, the company previously maintained reserves for costs associated with restaurant closures, undeveloped sites, or sales to franchisees, but this practice has changed. These reserves, which amounted to $4.3 million at the time of transition to ASC 842 in fiscal year 2022, were initially accounted for as a reduction to "operating right-of-use assets, net." However, post-ASC 842 adoption, Checkersrallys assesses leases for impairment and no longer recognizes these specific reserves. Consequently, there was no activity related to restaurant retirement or refranchising reported for the year ending January 1, 2024.
Before adopting ASC 842, the reserves covered ongoing costs for closed or undeveloped restaurants, or those sold to franchisees with subleases where the sublease rents were less than the original lease obligations. These costs primarily included non-cancelable rent payments due over the remaining contractual rent period at the cease-use date, net of estimated or actual sublease rental income, and estimates of related contractual property taxes. The time frame for these estimated cash outlays ranged from two to ten years.
For closed or undeveloped restaurants, these costs were discounted at a credit-adjusted risk-free rate. In cases where properties were subleased or had the potential for subleasing at amounts less than the original rent, the initial reserve was reduced by the actual or estimated sublease income based on local market conditions and Checkersrallys's past experiences. The company completed disposal and sale activities within the periods the expense was recognized, with the recognized expense representing the total estimated costs to be incurred. Prospective franchisees should inquire with Checkersrallys about the current policies and potential costs associated with restaurant closures or transfers, as the information in the FDD reflects past practices that may not be indicative of future financial obligations.