Tasty (TAST): Useful life and possible accounting flattery

Started to look at Tasty’s 2019 annual report for a write-up on my blog:

Given what has happened to the company during recent years and the pandemic, the following issue is perhaps not the greatest worry for shareholders right now. However the accounting small-print involved is worth highlighting.

The issue concerns the useful life of tangible assets. Companies can spread out the initial cost of a tangible asset over its useful life through an annual depreciation charge. Apply a useful life that is too long, however, and depreciation is then calculated too thinly every year and so reported earnings can be flattered.

Tasty is a restaurant chain and its major assets are fixtures, fittings, equipment etc inside the restaurants. Tasty reckons the useful life of such items is 10 years (i.e. equivalent to a 10% straight-line charge to a zero residual value):

For comparison, restaurant chain Fulham Shore has a mix of useful lives ranging from 3 to 10 years:

Restaurant Group has the same 3 to 10 year mix:

I have looked at Loungers, Revolution Bars and JD Wetherspoon, which are cafe/bar/pub chains and not pure restaurant groups, but their useful lives are 3-15 years, 5 years and 3-10 years respectively.

(The 15 years at Loungers relates to ‘artwork’, which seems ambitious as well).

Anyway, the upshot is Tasty – at least compared to a small sample of similar-ish operators – has a more optimistic view of the longevity of its restaurant fit-outs. So Tasty’s depreciation charge is likely to have been spread too thinly compared to policies adopted by similar-ish businesses.

Has this policy flattered Tasty’s past profits? Possibly.
Could the policy signal Tasty’s directors being a tad optimistic on other matters? Possibly.

Note that Tasty’s annual report also implies the useful life of its computers is 20 years, which seems ridiculous to me.

I wish I had studied this accounting policy a few years ago. I may have been a little more cynical about Tasty’s ambitions.

Maynard

Computers 5% straight line - so a 20 year life! Hands up who has a 20 year old computer still in use …

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Thanks Roger.

Digging up this old post reminded me to double check the same accounting at Prezzo, a previous Kaye-family restaurant chain.

The same 10-year useful life as Tasty, although computers are 3 years:

PRZ was a successful Kaye operation, and perhaps this firm ‘got away’ with the accounting due to successful trading. TAST never could match PRZ’s margins and the industry downturn – amplified by the pandemic – has led to TAST incurring significant write-offs suggesting that the useful life policy was indeed optimistic.

Maynard