How does Dollar Rent A Car determine the recoverability of long-lived assets?
Dollar_Rent_A_Car Franchise · 2025 FDDAnswer from 2025 FDD Document
Long-lived assets are amortized using the straight-line method over the estimated economic lives of the assets, which range from one to forty years. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. Measurement of an impairment loss for long-lived assets that management expects to hold and use is based on the estimated fair value of the asset. Long-lived assets to be disposed of are reported at the lower of carrying value or estimated fair value less costs to sell.
During the third quarter of 2024, at the conclusion of the Company's historical peak rental season, there was a reduction in the cash flow projections in the Americas RAC and International RAC segments, indicating that the carrying values of their long-lived assets may not be recoverable. The reduction was largely attributed to the acceleration of the rental fleet rotation in the segments, where shortening the useful life reduced the potential future cash flows expected to be earned from the fleet. Operating cash flow projections also deteriorated from delayed timing of operating cost improvements and longer timeframes associated with revenue maximization initiatives. As a result, the Company tested the recoverability of its long-lived assets, consisting of revenue earning vehicles, ROU assets and property and equipment (collectively, the "Long-Lived Assets") in its Americas RAC and International RAC segments by comparing the carrying values against undiscounted future cash flow projections and determined that an impairment existed.
Effective August 31, 2024, the Long-Lived Assets were written down to their estimated fair values. The fair value for revenue earning vehicles was determined using a market approach utilizing prices for similar assets in active markets. Fair value for ROU assets was determined using a discounted cash flow income approach considering estimated market rent. The fair value for property and equipment was determined using a market approach, where available, and where not available, a cost approach utilizing estimated replacement cost. This resulted in recognizing impairment charges of $923 million and $125 million against the Company's revenue earning vehicles and ROU assets, respectively. No impairment was recognized for property and equipment assets.
Further changes in market conditions or the performance of our long-lived assets could result in an additional impairment charge.
Source: Item 23 — RECEIPTS (FDD pages 102–301)
What This Means (2025 FDD)
According to Dollar Rent A Car's 2025 Franchise Disclosure Document, the company reviews long-lived assets for impairment whenever events or changes in circumstances suggest that the carrying value of these assets may not be recoverable. This determination is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. For assets that Dollar Rent A Car expects to hold and use, the measurement of an impairment loss is based on the estimated fair value of the asset. Long-lived assets that are slated for disposal are reported at the lower of their carrying value or estimated fair value, less the costs to sell.
In simpler terms, Dollar Rent A Car assesses whether the value of its long-term assets (like vehicles, property, and equipment) has declined. If there's an indication that an asset's value might not be fully recoverable through future use or sale, the company estimates the expected future cash flows from the asset. If these cash flows are less than the asset's current book value, an impairment loss is recognized. The asset's value is then written down to its estimated fair value.
For a prospective franchisee, this accounting practice is important because it can affect Dollar Rent A Car's reported earnings and financial position. Significant impairment charges, such as the $923 million and $125 million charges recognized against revenue earning vehicles and ROU assets respectively in 2024, can reduce profitability. While these charges don't directly impact a franchisee's day-to-day operations, they reflect the overall financial health and management's assessment of the company's assets. Franchisees should be aware of these potential fluctuations in asset values and how they might influence the franchisor's financial stability and strategic decisions.
It is important to note that the FDD states that further changes in market conditions or the performance of long-lived assets could result in additional impairment charges. This means that the value of Dollar Rent A Car's assets is subject to change, and franchisees should be aware of this risk.