How does Management Recruiters record intangible assets that it acquires?
Management_Recruiters Franchise · 2024 FDDAnswer from 2024 FDD Document
Intangible assets acquired are recorded at fair value. We test our finite-lived intangible assets for impairment whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. We test our indefinite-lived intangible assets for impairment annually or whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable (see "Impairment" below). If the carrying value exceeds the fair value, we recognize an impairment in an amount equal to the excess, not to exceed the carrying value. Management uses considerable judgment to determine key assumptions, including projected revenue, royalty rates and appropriate discount rates. There were no intangible asset impairment charges in 2023 or 2022*.*
Finite-lived intangible assets are amortized using the straight-line method over their estimated useful lives, which ranges from 5 to 15 years. Our finite-lived intangible assets include acquired franchise agreements, acquired customer relationships, acquired customer lists, internally developed software, and purchased software. Our indefinite-lived intangible assets include acquired domain names and acquired trade names. For additional information related to significant additions to intangible assets, see Note 2 - Acquisitions.
Source: Item 21 — FINANCIAL STATEMENTS (FDD pages 65–66)
What This Means (2024 FDD)
According to Management Recruiters' 2024 Franchise Disclosure Document, the company records intangible assets that it acquires at their fair value. Management Recruiters assesses these assets for impairment, testing finite-lived assets when circumstances suggest the carrying value may not be recoverable and testing indefinite-lived assets annually or when circumstances change. If the carrying value exceeds the fair value, Management Recruiters recognizes an impairment equal to the excess, not exceeding the carrying value. Determining key assumptions such as projected revenue, royalty rates, and discount rates requires considerable judgment.
Management Recruiters amortizes finite-lived intangible assets using the straight-line method over their estimated useful lives, which range from 5 to 15 years. These assets include acquired franchise agreements, customer relationships, customer lists, internally developed software, and purchased software. Indefinite-lived intangible assets include acquired domain names and trade names. Significant additions to intangible assets are further detailed in Note 2 - Acquisitions.
For example, Management Recruiters completed the acquisition of Snelling Staffing for $17.9 million on March 1, 2021, accounting for it under the acquisition method. The purchase price was allocated to assets and liabilities based on their fair values, including $12.7 million in identified intangible assets and a bargain purchase gain of $5.6 million. The most significant intangible assets acquired were franchise agreements, valued using the multi-period excess earnings method, which relies on management's estimates of revenue growth, royalty rates, and discount rates. The valuation of these franchise agreements was identified as a critical audit matter due to the significant estimates involved.