In the restaurant industry, Accounting Standards Codification (ASC) 360, Property, Plant, and Equipment (PP&E) typically represents a major investment, covering everything from kitchen equipment and furniture to leasehold improvements. While essential to operations, these assets are also vulnerable to impairment losses due to shifting economic conditions, market dynamics, and internal performance challenges. In an environment defined by shifting consumer preferences, rising operating costs, and evolving real-estate economics, restaurants face unique financial reporting challenges, particularly when it comes to asset impairment assessment.
Read Also: Mastering Property, Plant, & Equipment: A Guide To PPE Reporting
Under U.S. GAAP, the restaurant industry’s heavy investment in long-lived assets, leasehold improvements, and acquired trade names makes impairment testing an essential part of accurate, transparent financial reporting.
Below is a streamlined summary of impairment types and their GAAP requirements.
Impairment Overview for Restaurant Operators (Summary Table)
| Asset Category Subject To Impairment | Trigger Examples (Restaurant-Specific) | Testing Approach & Key Considerations for Restaurants |
| Long-Lived Assets (Leasehold improvements, equipment, furniture, right-of-use (ROU) assets) (ASC 360) | • Declining same-store sales. • Negative store-level EBITDA. • Closure, remodel, or relocation plans. • Rising rent-to-sales ratios. |
• Conduct trigger assessment at restaurant-unit level. • Perform an undiscounted cash flow recoverability test. • If not recoverable, measure impairment using fair value. • For ROU assets, only the asset is impaired; lease liability remains unchanged. • High-risk due to fixed costs and dependence on local market performance. |
| Goodwill (ASC 350) | • Declining brand-level sales. • Weakening unit economics. • Market or strategic shifts. |
• Test annually or upon triggering events. • Compare fair value of reporting unit to carrying value. • Ensure reporting unit structure matches how management evaluates the business. |
| Indefinite-Lived Intangibles (Trade names, certain franchise rights) (ASC 350) | • Reduced brand equity. • Lower expected royalties. • Strategic repositioning. |
• Annual or trigger-based fair value tests. • Evaluate whether brand strength and economic value have changed. |
| Finite-Lived Intangibles (Finite franchise rights) (ASC 360) | • Same indicators as long-lived assets. | • Perform recoverability test, then fair value measurement if needed. • May require updates to amortization schedules. |
Preparing For Year-End Audit & Review Processes
Year-end audit and review procedures run more efficiently when impairment-related information is organized and ready in advance. The following simplified steps help ensure a smooth process:
1. Identify Triggering Events & Provide Store-Level Cash Flow/EBITDA Analysis
Before year-end, evaluate whether any locations showed impairment indicators such as declining sales, negative normalized EBITDA trends/cash flows, or potential closure or relocation plans. Prepare a by-store cash flow or EBITDA analysis summarizing performance and clearly highlighting units that may require impairment testing. This analysis should be provided directly to auditors, as it serves as the foundation for their triggering event evaluation and subsequent testing procedures.
2. Prepare Discounted Cash Flow Forecasts (As Needed)
If a triggering event is identified based on the above, develop simple, supportable cash flow forecasts for the affected locations. These forecasts should be consistent with internal budgets and include brief explanations for major assumptions for projected increases and decreases. This cash flow forecast should not exceed the remaining years on the lease agreement.
Take Action: Strengthen Compliance and Operational Performance With GBQ
Impairment accounting under GAAP is a critical process for restaurant operators navigating a competitive and margin-sensitive industry. By proactively identifying triggers, maintaining clear documentation, and preparing targeted information for year-end audits or reviews, restaurant groups can ensure compliance while gaining deeper insight into operational performance and long-term strategy. In the meantime, if you are in need of assistance or additional insight, contact GBQ’s restaurant services team today.
By Kari Maue, CPA, Director, Assurance & Advisory
In search of additional GAAP insights? Check out these resources:
Your Restaurant’s Big Purchases: And How GAAP Says To Depreciate Them
Unwrapping Rules For Gift Card Accounting Under GAAP
Restaurants Are Outsourcing Their Accounting Functions
