How did Checkersrallys recognize reserves for restaurant retirement costs before adopting ASC 842?
Checkersrallys Franchise · 2025 FDDAnswer from 2025 FDD Document
outcome of tax audits is always uncertain, the Company believes adequate amounts of tax, including interest and penalties, have been provided for any adjustments that are expected to result from those years.
(Tabular Dollars in Thousands, Except Share and per Share Data)
Reserves for Restaurant Retirement and Refranchising Costs
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.
The Company periodically subleases land and buildings in connection with the sale of Company-operated restaurants to franchisees. In certain cases, the terms of the sublease provide for rents from sublessees that are less than the rents the Company is obligated to pay under the original lease.
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, according to ASC 420, Exit or Disposal Cost Obligations. Upon closing or abandoning a site, Checkersrallys would reserve all remaining contractual rent and property tax payments, net of any actual or estimated sublease rentals.
The valuation of these reserves for restaurant retirement costs considered several factors. These included the remaining payments under the lease terms, reduced by estimated or actual sublease rentals that could reasonably be obtained. These figures were then discounted at a credit-adjusted risk-free rate. The estimated sublease rentals were based on market conditions in the areas where the restaurants were located, as well as Checkersrallys's past experiences with similar sites. The discount rate used was the risk-free rate, adjusted for perceived risk in the projected cash flows, which was considered low for future rent payments.
In 2022, Checkersrallys adopted ASC 842, Leases. Upon adoption, the $4.3 million in reserves for restaurant retirement and refranchising costs were included as a reduction to "operating right-of-use assets, net." Following this adoption, Checkersrallys assesses leases for impairment and no longer recognizes reserves for restaurant retirement and refranchising costs.