What happens if the carrying value of an intangible asset exceeds its fair value at Checkersrallys?
Checkersrallys Franchise · 2025 FDDAnswer from 2025 FDD Document
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 Checkersrallys's 2025 Franchise Disclosure Document, if the carrying value of an intangible asset exceeds its fair value, Checkersrallys will recognize an impairment loss. This loss is equal to the amount by which the carrying value exceeds the fair value. This process applies to intangible assets not subject to amortization. The fair value of these intangible assets is estimated using the relief from royalty valuation methodology, which relies on assumptions about future revenues, discount rates, and royalty rates. Discount rates are based on the risk inherent in the intangible assets, while royalty rates are based on projected profitability, franchisee agreements, and market rates.
In simpler terms, Checkersrallys assesses the value of its brand-related intangible assets (like trademarks). If the company determines that the recorded value of these assets on its balance sheet (the carrying value) is higher than what they are actually worth (the fair value), the company must acknowledge this difference as an impairment loss. This loss reduces the stated value of the asset on the balance sheet to reflect its true worth.
For a prospective Checkersrallys franchisee, this accounting practice might not have a direct day-to-day impact. However, it is important for franchisees to understand how Checkersrallys manages its assets and financial reporting. Significant impairment losses could signal underlying issues with the brand's performance or market position, which could indirectly affect franchisees. Therefore, while franchisees are not directly involved in these calculations, the overall financial health of the franchisor, as reflected in these types of accounting adjustments, is something to be aware of.
It's also worth noting that Checkersrallys 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 when circumstances suggest the carrying amount may not be recoverable. The company can perform either a qualitative or quantitative assessment of impairment, and may bypass the qualitative assessment to proceed directly to the quantitative test.