What is the depreciation method used for 1 800 Packouts' operating lease right-of-use assets?
1_800_Packouts Franchise · 2025 FDDAnswer from 2025 FDD Document
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, when a lease exists, the company records right-of-use (ROU) assets and lease liabilities as either operating or finance leases. The present value of lease payments is calculated using the implicit rate from the contract or the company's incremental borrowing rate. This rate is determined by estimating the cost to borrow a collateralized amount equal to the total lease payments over the lease term, based on the contractual terms and the location of the leased asset. This present value is then adjusted for prepaid lease payments, lease incentives, and initial direct costs.
For 1 800 Packouts, lease expense is recognized on a straight-line basis over the expected lease term. This means that the expense is spread evenly over the life of the lease, providing a consistent charge to the income statement each period. Non-lease costs, 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.
In February 2016, the Financial Accounting Standards Board issued ASU No. 2016-02, Leases (ASC Topic 842), which replaces prior lease accounting guidance. 1 800 Packouts elected the package of practical expedients permitted in ASC Topic 842 and accounted for its existing operating leases as operating leases under the new guidance, without reassessing certain factors. On January 1, 2022, the Company recognized $1,175,322 in operating lease liabilities and right-of-use (ROU) assets. The adoption of this guidance did not have a material impact on net loss.