What is the depreciation schedule used by 1 800 Packouts for its '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's 2025 Franchise Disclosure Document, lease expenses for arrangements where a lease exists are recognized on a straight-line basis over the expected lease term. This applies to both operating and finance leases, where related Right-of-Use (ROU) assets and lease liabilities are recorded.
The present value of lease payments is calculated at the beginning or when changes are made to the lease. This calculation uses the interest rate that's implicitly part of the lease agreement. If that rate isn't determinable, 1 800 Packouts uses its incremental borrowing rate. This rate estimates what it would cost 1 800 Packouts to borrow an amount equal to the lease payments over the lease term, considering the lease's contractual terms and the location of the leased asset. The present value is then adjusted to account for any prepaid lease payments, lease incentives, and initial direct costs.
It's important to note that non-lease costs, such as common-area maintenance, taxes, and insurance, are not included when measuring the ROU assets and lease liabilities. Additionally, the depreciable life of assets and leasehold improvements is limited to the expected lease term. This means that franchisees should align their depreciation schedules with the lease term to accurately reflect the expense over the period they have the right to use the asset.