What valuation methodology does Checkersrallys use to estimate the fair value of intangible assets not subject to amortization?
Checkersrallys Franchise · 2025 FDDAnswer from 2025 FDD Document
Intangible assets not subject to amortization consist of the brands (tradenames) intangible assets. A quantitative impairment test performed on these intangible assets consists of a comparison of their fair value with their carrying value. The Company 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 whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The authoritative guidance allows a company to perform a qualitative or a quantitative assessment of impairment. A company may first perform a qualitative assessment to determine whether it is necessary to perform the quantitative impairment test or it could also bypass the qualitative assessment and proceed directly to performing the quantitative impairment test.
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, the company uses the relief from royalty valuation methodology to determine the fair value of intangible assets that are not subject to amortization. These intangible assets primarily consist of the brand's tradenames.
This valuation involves comparing the fair value of these assets with their carrying value. If the carrying value exceeds the fair value, Checkersrallys recognizes an impairment loss equivalent to the excess amount. The estimation process relies on several significant assumptions, including projections of future revenues from related sales, the selection of an appropriate discount rate, and the determination of a suitable royalty rate.
The discount rate assumptions are based on an assessment of the risks associated with the specific intangible assets. Royalty rate assumptions consider projected profitability, existing franchisee agreements, and comparable market rates. These assumptions are critical in determining the fair value of the intangible assets and, consequently, the financial health of Checkersrallys.
Prospective franchisees should understand that these valuations are subject to change based on market conditions, company performance, and other factors. It is important for franchisees to monitor Checkersrallys's financial statements and related disclosures to stay informed about the valuation of these intangible assets and any potential impacts on the company's financial position.