How does 1 800 Packouts account for operating lease right-of-use assets?
1_800_Packouts Franchise · 2025 FDDAnswer from 2025 FDD Document
Management determines if a contract is or contains a lease at inception or modification of a contract. A contract is or contains a lease if the contract conveys the right to control the use of an identified asset for a period in exchange for consideration. Control over the use of the identified asset means the lessee has both (a) the right to obtain substantially all of the economic benefits from the use of the asset and (b) the right to direct the use of the asset. Such assets are classified as ROU assets with a corresponding lease liability.
For all arrangements where it is determined that a lease exists, the related ROU assets and lease liabilities are recorded as either operating or finance leases. At inception or modification, the Company calculates the present value of lease payments using the implicit rate determined from the contract or the Company's incremental borrowing rate applicable to the lease, which is determined by estimating what it would cost the Company to borrow a collateralized amount equal to the total lease payments over the lease term based on the contractual terms of the lease and the location of the leased asset. The present value is adjusted for prepaid lease payments, lease incentives, and initial direct costs. Lease expense is recognized for these leases on a straight-line basis over the expected lease term. Non-lease costs,such as common-area maintenance costs, taxes, and insurance, are not included in the measurement of the ROU assets and lease liabilities. The depreciable life of assets and leasehold improvements are limited by the expected lease term.
Source: Item 23 — RECEIPT (FDD pages 67–238)
What This Means (2025 FDD)
According to 1 800 Packouts's 2025 Franchise Disclosure Document, the company determines if a contract contains a lease at the beginning or when changes are made to the contract. A lease exists if the contract allows control over an asset for a period in exchange for payment. Control means the lessee can obtain most of the economic benefits from the asset and direct its use. These assets are then classified as Right-of-Use (ROU) assets with a corresponding lease liability.
For any arrangement determined to be a lease, 1 800 Packouts records the related ROU assets and lease liabilities as either operating or finance leases. The company calculates the present value of lease payments using the implicit rate from the contract or its incremental borrowing rate. This rate estimates the cost to borrow an equivalent collateralized amount over the lease term, based on the lease's contractual terms and the asset's location. The present value is then adjusted for prepaid lease payments, lease incentives, and initial direct costs.
1 800 Packouts recognizes lease expenses for these leases on a straight-line basis over the expected lease term. Costs not related to the lease, such as common-area maintenance, taxes, and insurance, are excluded from the measurement of ROU assets and lease liabilities. The depreciable life of assets and leasehold improvements are limited by the expected lease term. This accounting method ensures that 1 800 Packouts accurately reflects its lease obligations and asset utilization in its financial statements.