Current Expected Credit Losses ("CECL")

9 Months Ended

Sep. 30, 2023

Credit Loss [Abstract]

Current Expected Credit Losses ("CECL")

Current Expected Credit Losses (“CECL”)

The CECL reserve methodology requires companies to measure expected credit losses on financial instruments based on the total estimated amount to be collected over the lifetime of the instrument. Under the CECL model, reserves may be established against financial asset balances even if the risk of loss is remote or has not yet manifested itself. The Company records specific reserves against account balances of franchisees deemed at-risk when a potential loss is likely or imminent as a result of prolonged payment delinquency (greater than 90 days past due) and where notable credit deterioration has become evident. For financial assets that are not currently deemed at-risk, an allowance is recorded based on expected loss rates derived pursuant to the Company's CECL methodology that assesses four components - historical losses, current conditions, reasonable and supportable forecasts, and a reversion to history, if applicable.

The Company considers its portfolio segments to be the following:

Accounts Receivable (Franchise-Related)

Most of the Company’s short-term receivables due from franchisees are derived from royalty, advertising and other franchise-related fees.

Gift Card Receivables

Gift card receivables consist primarily of amounts due from third-party vendors. Receivables related to gift card sales are subject to seasonality and usually peak around year-end as a result of the December holiday season.

Notes Receivable

Notes receivable balances primarily relate to the conversion of certain past due Applebee's franchisee accounts receivable to notes receivable, cash loans to franchisees for working capital purposes, a note receivable in connection with the sale of IHOP company restaurants, and IHOP franchise fee and other notes. The notes are typically collateralized by the franchise. A significant portion of these notes have specific reserves recorded against them amounting to $6.7 million as of September 30, 2023.

Equipment Leases Receivable

Equipment leases receivable primarily relate to IHOP franchise development activity prior to 2003 when IHOP typically leased or purchased the restaurant site, built and equipped the restaurant, then franchised the restaurant to a franchisee. Equipment lease contracts are collateralized by the equipment in the restaurant. The estimated fair value of the equipment collateralizing these lease contracts are not deemed to be significant given the very seasoned and mature nature of this portfolio. The weighted average remaining life of the Company’s equipment leases is 3.4 years as of September 30, 2023.

Real Estate Leases Receivable

Real estate leases receivable primarily relate to IHOP franchise development activity prior to 2003 when IHOP provided the financing for leasing or subleasing the site. Real estate leases at September 30, 2023, comprised 29 leases with a weighted average remaining life of 10.8 years, and relate to locations that IHOP is leasing from third parties and subleasing to franchisees.

Distributor Receivables

Receivables due from distributors are related to the sale of IHOP’s proprietary pancake and waffle dry mix to franchisees through the Company’s network of suppliers and distributors and are included as part of Other receivables.

	September 30, 2023		December 31, 2022
	(In millions)
Accounts receivable	$	66.1	$	67.5
Gift card receivables	6.4		34.6
Notes receivable	16.0		17.2
Financing receivables:
Equipment leases receivable	21.4		26.6
Real estate leases receivable	16.9		18.5
Other	5.2		5.6
	132.0		170.0
Less: allowance for credit losses and notes receivable	(10.6)		(10.3)
	121.4		159.7
Less: current portion	(85.7)		(120.0)
Long-term receivables	$	35.7	$	39.7

The Company's primary credit quality indicator for all portfolio segments is delinquency.

Changes in the allowance for credit losses during the nine months ended September 30, 2023 were as follows:

	Accounts Receivable		Notes receivable, short-term		Notes receivable, long-term		Lease Receivables		Equipment Notes		Other (1)		Total
	(In millions)
Balance, December 31, 2022	$	1.2	$	3.5	$	5.3	$	0.1	$	0.1	$	0.1	$	10.3
Bad debt (credit) expense	1.5		0.2		(0.0)		(0.0)		0.8		0.1		2.6
Advertising provision adjustment	0.7		(0.2)		—		—		—		—		0.5
Write-offs	—		(1.6)		(0.4)		(0.0)		(0.8)		(0.0)		(2.8)
Balance, September 30, 2023	$	3.4	$	1.9	$	4.9	$	0.1	$	0.1	$	0.2	$	10.6

(1) Primarily distributor receivables, gift card receivables and credit card receivables.

The delinquency status of receivables (other than accounts receivable, gift card receivables and distributor receivables) at September 30, 2023 was as follows:

	Notes receivable, short-term		Notes receivable, long-term		Real Estate Lease Receivable		Equipment Notes		Other (1)		Total
	(In millions)
Current	$	4.2	$	11.7	$	16.9	$	21.4	$	0.0	$	54.2
30-59 days	0.0		—		—		—		—		—
60-89 days	0.0		—		—		—		—		—
90-119 days	0.0		—		—		—		—		—
120+ days	0.1		—		—		—		—		0.1
Total	$	4.3	$	11.7	$	16.9	$	21.4	$	0.0	$	54.3

(1) Primarily credit card receivables.

The year of origination of the Company's notes receivable and financing receivables is as follows:

	Notes receivable, short and long-term		Lease Receivables		Equipment Notes		Total
	(In millions)
2023	$	5.6	$	1.4	$	1.0	$	8.0
2022	1.0		8.1		—		9.1
2021	9.1		2.4		—		11.5
2020	0.3		1.3		—		1.6
2019	—		0.7		—		0.7
Prior	—		3.0		20.4		23.4
Total	$	16.0	$	16.9	$	21.4	$	54.3

The Company does not place its financing receivables in non-accrual status.