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Commitments and contingencies | 12 Months Ended
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Dec. 31, 2022
Commitments and Contingencies Disclosure [Abstract] |
Commitments and contingencies | Commitments and contingencies Commitments The MFAs require the Company and its MF subsidiaries, among other obligations: (i)to agree with McDonald’s Corporation on a restaurant opening plan and a reinvestment plan for each three-year period or such other commitment or period that McDonald’s may approve; and pay an initial franchise fee for each new restaurant opened; (ii)to pay monthly royalties commencing at a rate of approximately 5% of gross sales of the restaurants, during the first 10 years. This percentage increases to 6% and 7% for the subsequent two five-year periods of the agreement. Nevertheless, at times, McDonald’s Corporation has supported Company’s investment plans by agreeing to provide an incentive (the “growth support”), which result or is expected to result in a lower royalty rate. (iii)to commit to funding a specified Strategic Marketing Plan; that includes the expenditure of 5% of the Company’s gross sales on Advertising and Promotion activities. (iv)to own (or lease) directly or indirectly, the fee simple interest in all real property on which any franchised restaurant is located; and (v)to maintain a minimum fixed charge coverage ratio (as defined therein) at least equal to 1.50 as well as a maximum leverage ratio (as defined therein) of 4.25. If the Company would not be in compliance with these commitments under the MFA, it could be in material breach. A breach of the MFA would give McDonald’s Corporation certain rights, including the ability to acquire all or portions of the business. Due to the dynamic environment in 2021, after the disruptions caused by the COVID-19 pandemic, the Company agreed with McDonald’s Corporation on a growth and investment plan for only one year and received a growth support that resulted in a consolidated effective royalty rate of 5.2% of sales of 2021. Additionally, on January 10, 2022, the Company reached an agreement with McDonald’s Corporation on a new growth and investment plan for next years. McDonald’s Corporation has agreed to continue providing the Company with growth support under certain terms and conditions. To support its future growth, the Company plans to open at least 200 new restaurants and to modernize at least 400 restaurants, with capital expenditures of approximately $650 million from 2022 to 2024. In addition, McDonald’s Corporation agreed to continue providing growth support which resulted in an effective royalty rate of about 5.6% of sales in 2022 and is expected to result in an effective royalty rate of about 6.0% of sales in 2023 and 2024. Commitments (continued) For the period ended December 31, 2022, the Company was in compliance with the ratio requirements mentioned in point (v) above. The ratios for the periods mentioned, were as follows:
|  | Fixed Charge Coverage Ratio |  | Leverage Ratio |
March 31, 2022 |  | 1.93 |  | 3.67 |
June 30, 2022 |  | 1.91 |  | 3.43 |
September 30, 2022 |  | 1.98 |  | 3.42 |
December 31, 2022 |  | 1.85 |  | 3.42 |
In addition, the Company maintains standby letters of credit in favor of McDonald’s Corporation as collateral for the obligations assumed under the MFAs, for a total aggregate drawing amount of $80 million. These letters of credit can be drawn if certain events occur, including the failure to pay royalties. No amounts have been drawn at the date of issuance of these financial statements. The following table presents information related to the standby letters of credit:
| Bank |  | Currency |  | Amount
| Itaú |  | $ |  | 15,000
| Credit Suisse (i) |  | $ |  | 45,000
| JPMorgan (i) |  | $ |  | 20,000
(i) Maintained through its wholly-owned subsidiary ADBV. These letters of credit contain a limited number of customary affirmative and negative covenants, including a maximum indebtedness to EBITDA ratio, as follows:
Bank |  | Ratio |  | Required Maximum Ratio |  | As of December 31, 2022
Itaú |  | Net indebtedness to EBITDA |  | 4.5 |  | 0.94
Credit Suisse (i) |  | Indebtedness to EBITDA |  | 4.0 |  | 0.88
JPMorgan (i) |  | Indebtedness to EBITDA |  | 4.5 |  | 0.88
(i) Maintained through its wholly-owned subsidiary ADBV. As of December 31, 2022 all the ratios were in compliance. Provision for contingencies The Company has certain contingent liabilities with respect to existing or potential claims, lawsuits and other proceedings, including those involving labor, tax and other matters. At December 31, 2022 and 2021, the Company maintains a provision for contingencies, net of judicial deposits, amounting to $44,839 and $34,086, respectively, presented as follow: $2,272 and $2,140 as a current liability and $42,567 and $31,946 as a non-current liability, respectively. The breakdown of the provision for contingencies is as follows:
Description |  | Balance at beginning of period |  | Accruals, net |  | Settlements |  | Reclassifications and increase of judicial deposits |  | Translation |  | Balance at end of period
Year ended December 31, 2022: |  |  |  |  |  |  |  |  |  |  |  |
Tax contingencies in Brazil (i) |  | $ | 16,642 |  |  | $ | 11,166 |  |  | $ | (12) |  |  | $ | — |  |  | $ | 709 |  |  | $ | 28,505 |
Labor contingencies in Brazil (ii) |  | 13,270 |  |  | 12,426 |  |  | (13,449) |  |  | 1,094 |  |  | 754 |  |  | 14,095 |
Other (iii) |  | 10,766 |  |  | 3,449 |  |  | (2,763) |  |  | — |  |  | (1,307) |  |  | 10,145 |
Subtotal |  | 40,678 |  |  | 27,041 |  |  | (16,224) |  |  | 1,094 |  |  | 156 |  |  | 52,745 |
Judicial deposits (iv) |  | (6,592) |  |  | — |  |  | — |  |  | (953) |  |  | (361) |  |  | (7,906) |
Provision for contingencies |  | $ | 34,086 |  |  | $ | 27,041 |  |  | $ | (16,224) |  |  | $ | 141 |  |  | $ | (205) |  |  | $ | 44,839 |
Year ended December 31, 2021: |  |  |  |  |  |  |  |  |  |  |  |
Tax contingencies in Brazil (i) |  | $ | 10,662 |  |  | $ | 7,472 |  |  | $ | — |  |  | $ | (517) |  |  | $ | (975) |  |  | $ | 16,642 |
Labor contingencies in Brazil (ii) |  | 14,514 |  |  | 11,319 |  |  | (12,080) |  |  | 522 |  |  | (1,005) |  |  | 13,270 |
Other (iii) |  | 9,907 |  |  | 3,764 |  |  | (1,708) |  |  | (136) |  |  | (1,061) |  |  | 10,766 |
Subtotal |  | 35,083 |  |  | 22,555 |  |  | (13,788) |  |  | (131) |  |  | (3,041) |  |  | 40,678 |
Judicial deposits (iv) |  | (8,135) |  |  | — |  |  | — |  |  | 1,030 |  |  | 513 |  |  | (6,592) |
Provision for contingencies |  | $ | 26,948 |  |  | $ | 22,555 |  |  | $ | (13,788) |  |  | $ | 899 |  |  | $ | (2,528) |  |  | $ | 34,086 |
Year ended December 31, 2020: |  |  |  |  |  |  |  |  |  |  |  |
Tax contingencies in Brazil (i) |  | $ | 10,595 |  |  | $ | 2,040 |  |  | $ | — |  |  | $ | 435 |  |  | $ | (2,408) |  |  | $ | 10,662 |
Labor contingencies in Brazil (ii) |  | 16,839 |  |  | 12,087 |  |  | (10,499) |  |  | — |  |  | (3,913) |  |  | 14,514 |
Other (iii) |  | 11,404 |  |  | 1,203 |  |  | (1,421) |  |  | — |  |  | (1,279) |  |  | 9,907 |
Subtotal |  | 38,838 |  |  | 15,330 |  |  | (11,920) |  |  | 435 |  |  | (7,600) |  |  | 35,083 |
Judicial deposits (iv) |  | (12,680) |  |  | — |  |  | — |  |  | 1,626 |  |  | 2,919 |  |  | (8,135) |
Provision for contingencies |  | $ | 26,158 |  |  | $ | 15,330 |  |  | $ | (11,920) |  |  | $ | 2,061 |  |  | $ | (4,681) |  |  | $ | 26,948 |
(i)In 2022 and 2021, it includes mainly INSS (Instituto Nacional do Seguro Social) and CIDE (Contribuições de Intervenção no Domínio Econômico). In 2020, it includes mainly CIDE. (ii)It primarily relates to dismissals in the normal course of business. (iii)It relates to tax and labor contingencies in other countries and civil contingencies in all the countries. (iv)It primarily relates to judicial deposits the Company was required to make in connection with the proceedings in Brazil. As of December 31, 2022, there are certain matters related to the interpretation of tax (for income tax matters refer to note 16), customs, labor and civil laws for which there is a reasonable possibility that a loss may have been incurred in accordance with ASC 450-20-50-4 within a range of $430 million and $469 million. In accordance with ASC 405-20-50-6, unasserted claims or assessments that do not meet the conditions mentioned have not been included. Provision for contingencies (continued)Pursuant to Section 9.3 of the Stock Purchase Agreement, McDonald’s Corporation indemnifies the Company for certain Brazilian claim. At December 31, 2022, the provision for contingencies includes $1,297 ($1,188 at December 31, 2021), related to this claim. As a result, the Company has recorded a non-current asset in respect of McDonald’s Corporation’s indemnity within “Miscellaneous” in the consolidated balance sheet.

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