The COVID-19 pandemic made 2020 a challenging year for restaurant operators. For many restaurants, the difficulties caused by the pandemic will require management to review the carrying amounts of long-lived assets for potential impairment. Impairment is the write-down of value for assets on your balance sheet. Annual review of asset carrying amounts is standard for most companies, however, during typical years of operations, there is rarely a reason for impairment. It is likely that this year, due to the changes in operations for restaurants during 2020, many restaurant assets could require impairment.
Steps to determine impairment:
- Determine if a triggering event has occurred that might impact the carrying value of long-lived assets. Triggering events, as defined by U.S. accounting standards, are comprised of six circumstances which include a business experiencing an operating loss in the current year combined with a history or a projection of additional losses. Many restaurants likely experienced an operating loss in 2020 and may project additional losses in 2021 due to continued COVID-related operating restrictions. If this is the case for your restaurant, it is time to consider asset impairment.
- Evaluate and identify the assets that may require impairment. Assets are to be evaluated at the lowest level for which independent cash flows can be identified. For restaurants, this would likely be per store/restaurant. You will need to estimate the sum of the undiscounted future cash flows over the useful life of the assets. These estimates can be significant and may require the input of your management team or other professionals.
- If the carrying value of any asset exceeds the sum of the undiscounted future cash flows, impairment may be necessary. To determine the amount of the impairment adjustment, a more detailed calculation will need to be completed that involves discounting those future cash flows. This adjustment will ultimately reduce the carrying value of the asset to the recoverable amount and accurately reflect the value of the asset on your balance sheet for the future.
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Jessica Cassavant, CPA