How does Checkersrallys determine the discount rate used for restaurant retirement cost reserves?
Checkersrallys Franchise · 2025 FDDAnswer from 2025 FDD Document
Prior to the adoption of ASC 842, Leases, on January 4, 2022, the Company recognized reserves for restaurant retirement costs, which generally result from the closing or abandoning of a restaurant, in accordance with the provisions of ASC 420, Exit or Disposal Cost Obligations. Upon the closing of a restaurant or the abandoning of a site, the Company would reserve all remaining contractual rent and property tax payments, net of actual or estimated sublease rentals. The significant inputs into the valuation of reserves for restaurant retirement costs included payments remaining under the lease terms, reduced by estimated or actual sublease rentals that could reasonably be obtained, discounted at a credit-adjusted risk-free rate. The estimated sublease rentals are based on market conditions in the areas where the restaurants are located and the Company's experience with previous sites. The discount rate is the risk-free rate adjusted for perceived risk in the projected cash flows, which is deemed low in the case of future rent payments.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 91)
What This Means (2025 FDD)
According to Checkersrallys's 2025 Franchise Disclosure Document, prior to January 4, 2022, Checkersrallys recognized reserves for restaurant retirement costs, typically resulting from closing or abandoning a restaurant, following ASC 420 guidelines. Upon closing or abandoning a site, Checkersrallys would reserve the remaining contractual rent and property tax payments, net of any actual or estimated sublease rentals.
The key factors in valuing these reserves included the remaining payments under the lease terms, reduced by potential sublease rentals, and then discounted at a credit-adjusted risk-free rate. The estimated sublease rentals were based on market conditions in the restaurant's location and Checkersrallys's past experience with similar sites.
The discount rate used was the risk-free rate, adjusted to account for the perceived risk in the projected cash flows. Checkersrallys deemed this risk to be low, especially concerning future rent payments. However, Checkersrallys adopted ASC 842, Leases, in fiscal year 2022 and no longer recognizes reserves for restaurant retirement and refranchising costs.