In the context of Hardees' financial statements, what accounting standard requires management to make estimates and assumptions?
Hardees Franchise · 2025 FDDAnswer from 2025 FDD Document
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Our most significant areas of estimation are:
estimation of future cash flows used to assess the recoverability of long-lived assets, including intangible assets, goodwill, finance lease assets and operating lease assets;
estimation, using actuarially determined methods, of our self-insured claim losses under our workers' compensation, general liability and auto liability insurance programs;
determination of appropriate estimated liabilities for loss contingencies;
determination of appropriate assumptions to use in evaluating leases for finance versus operating lease treatment, establishing depreciable lives for leasehold improvements and establishing straight-line rent expense periods;
estimation of the appropriate allowances associated with franchise and other receivables;
determination of the appropriate assumptions to estimate gift card breakage;
determination of the appropriate assumptions to estimate the fair value of share-based compensation; and
estimation of our deferred income tax asset valuation allowance, liabilities related to uncertain tax positions and effective tax rate.
Source: Item 21 — Financial Statements (FDD pages 84–85)
What This Means (2025 FDD)
According to Hardees's 2025 Franchise Disclosure Document, the preparation of financial statements in conformity with Generally Accepted Accounting Principles (GAAP) requires management to make estimates and assumptions. These estimates and assumptions impact the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period.
For a prospective Hardees franchisee, this means that some figures in the financial statements are not precise values but rather management's best judgments at the time. Actual results could differ from those estimates. This is a standard practice in accounting, but it introduces an element of uncertainty.
Hardees identifies several significant areas where estimations are crucial, including assessing the recoverability of long-lived assets (such as intangible assets, goodwill, finance lease assets, and operating lease assets), determining liabilities for loss contingencies, evaluating leases, establishing depreciable lives for leasehold improvements, determining straight-line rent expense periods, estimating allowances for franchise and other receivables, estimating gift card breakage, estimating the fair value of share-based compensation, and estimating deferred income tax asset valuation allowance, liabilities related to uncertain tax positions, and effective tax rate. These estimations can significantly affect the financial results presented.
A potential franchisee should understand that these estimates are subject to change and could impact Hardees' financial performance. It would be prudent to discuss these estimation methods with Hardees' management or a financial advisor to fully grasp their potential effects.