How does Potbelly Sandwich Works group assets for impairment assessment purposes?
Potbelly_Sandwich_Works Franchise · 2025 FDDAnswer from 2025 FDD Document
We assess potential impairments of our long-lived assets, which include property and equipment and right-of-use assets for operating leases, whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. Assets are grouped at the individual shop-level for the purposes of the impairment assessment because a shop represents the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. Recoverability of an asset group is measured by a comparison of the carrying amount of an asset group to its estimated forecasted shop cash flows expected to be generated by the asset group. The estimation of expected future net cash flows uses estimates, including growth rates, which are inherently uncertain and rely on assumptions regarding current and future economics and market conditions. If the carrying amount of the asset group exceeds its estimated forecasted shop cash flows, an impairment charge is recognized as the amount by which the carrying amount of the asset exceeds the fair value of the asset group in the impairment, loss on disposal of property and equipment and shop closures in the consolidated statement of operations. The fair value of the shop assets is determined using the income approach. Key inputs to this approach include forecasted shop cash flows, discount rate, and estimated market rent, which are all classified as Level 3 inputs. See "Fair Value Measurements" above for a definition of Level 3 inputs.
Source: Item 11 — FRANCHISOR'S ASSISTANCE, ADVERTISING, COMPUTER SYSTEMS, AND TRAINING (FDD pages 37–49)
What This Means (2025 FDD)
According to Potbelly Sandwich Works's 2025 Franchise Disclosure Document, the company groups assets at the individual shop level for impairment assessment. This is because each shop's cash flows are largely independent of other shops.
Potbelly Sandwich Works assesses impairment by comparing the carrying amount of an asset group to its estimated forecasted shop cash flows. These estimations involve growth rates and assumptions about current and future economic and market conditions. If the carrying amount exceeds the forecasted cash flows, an impairment charge is recognized. This charge is the difference between the carrying amount and the fair value of the asset group, which is then recorded as an impairment loss on disposal of property and equipment and shop closures in the consolidated statement of operations.
The fair value of shop assets is determined using the income approach, which relies on forecasted shop cash flows, discount rates, and estimated market rent, all classified as Level 3 inputs. These Level 3 inputs indicate that these valuations are based on unobservable data and require significant judgment from Potbelly Sandwich Works. This approach is standard in the franchise industry, as each location's performance is evaluated independently to ensure accurate financial reporting and asset management.