For Gold Star, what is the stated purpose of holding derivative financial instruments?
Gold_Star Franchise · 2025 FDDAnswer from 2025 FDD Document
The Company holds derivative financial instruments for the purpose of hedging the risks of certain identifiable and anticipated transactions. In general, the types of risks hedged are those relating to the changes in interest rates. In hedging the transactions the Company, in the normal course of business, holds the following type of derivative:
Derivatives are held only for the purpose of hedging such risks, not for speculation. Generally, the Company enters into hedging relationships such that changes in the fair values or cash flows of items and transactions being hedged are expected to be offset by corresponding changes in the values of the derivatives.
At December 31, 2024, 2023, and 2022, hedging relationships existed for the aforementioned derivative. The income statement effect has been recorded in these consolidated financial statements.
The Company incurred additional interest of $262,505, $262,154, and $84,816, for 2024, 2023, and 2022, respectively, from cash flow hedges. Cash flow hedges of forecasted transactions resulted in an aggregate debit balance of $308,433 remaining at December 31, 2024 in accumulated other comprehensive income. All forecasted transactions currently being hedged are expected to occur in July 2028.
Source: Item 23 — Receipts (FDD pages 53–163)
What This Means (2025 FDD)
According to Gold Star's 2025 Franchise Disclosure Document, the company holds derivative financial instruments to hedge risks associated with identifiable and anticipated transactions. Specifically, these risks relate to changes in interest rates. Gold Star uses these derivatives not for speculation, but to offset potential changes in the fair values or cash flows of hedged items and transactions.
For a prospective franchisee, this indicates that Gold Star actively manages its financial risks related to interest rate fluctuations. This can provide a degree of stability and predictability in Gold Star's financial performance, which indirectly benefits franchisees through a more stable franchise system.
The FDD states that at the end of 2024, 2023, and 2022, hedging relationships existed for the aforementioned derivative, and the income statement effect has been recorded in these consolidated financial statements. Additionally, Gold Star incurred additional interest of $262,505 in 2024, $262,154 in 2023, and $84,816 in 2022 from cash flow hedges. Cash flow hedges of forecasted transactions resulted in an aggregate debit balance of $308,433 remaining at December 31, 2024, in accumulated other comprehensive income, with all forecasted transactions currently being hedged expected to occur in July 2028. This shows that Gold Star uses hedging strategies to manage its financial exposures over several years.