How does 1 800 Packouts calculate the present value of lease payments?
1_800_Packouts Franchise · 2025 FDDAnswer from 2025 FDD Document
[Item 23: RECEIPT]
a. Contract Liabilities
Contract liabilities represent billings made to or payments received from franchisees for which the related performance obligation has not yet been fulfilled. This primarily consists of franchise fees that have been received but are deferred to be recognized over the term of the franchise agreement. Depositsfor conferences and trainings are also deferred until the point at which the service has been provided.
b. Leases
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' 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 of an asset for a period in exchange for payment. Control means the lessee can obtain the economic benefits and direct the use of the asset. These assets are then classified as ROU (Right-of-Use) assets with a corresponding lease liability.
To calculate the present value of lease payments, 1 800 Packouts uses the implicit interest rate from the lease contract. If the implicit rate cannot be determined, the company uses its incremental borrowing rate. This rate is based on what it would cost 1 800 Packouts to borrow an amount equal to the total lease payments over the lease term, considering the lease's contractual terms and the location of the asset.
The present value is then adjusted to account for any prepaid lease payments, lease incentives received, and initial direct costs incurred. Lease expenses are recognized on a straight-line basis over the expected lease term. However, non-lease costs like common-area maintenance, taxes, and insurance are not included when measuring the ROU assets and lease liabilities. The depreciable life of the assets and any leasehold improvements are limited to the expected lease term.