What is the specific accounting treatment for 1 800 Packouts' operating lease right-of-use assets?
1_800_Packouts Franchise · 2025 FDDAnswer from 2025 FDD Document
ly 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.
c. Sales Tax
The Company accounts for sales tax on a net basis and excluded from revenues.
d. Shipping and Handling Costs
The Company classifies freight billed to customers as sales revenue and the related freight costs as cost of sales.
e.
Source: Item 23 — RECEIPT (FDD pages 67–238)
What This Means (2025 FDD)
According to 1 800 Packouts' 2025 Franchise Disclosure Document, the company recognizes right-of-use (ROU) assets and lease liabilities for arrangements where it's determined a lease exists, classifying them as either operating or finance leases. At the start or upon modification of a lease, 1 800 Packouts calculates the present value of lease payments. This calculation uses the implicit rate from the contract or the company's incremental borrowing rate, which estimates the cost to borrow a collateralized amount equal to the total lease payments over the lease term, based on the lease's contractual terms and the location of the leased asset. The present value is then adjusted for prepaid lease payments, lease incentives, and initial direct costs.
For operating leases, 1 800 Packouts recognizes lease expense 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.
For the year ending December 31, 2022, 1 800 Packouts reported amortization of operating lease right-of-use assets amounting to $108,253. This accounting treatment provides transparency regarding 1 800 Packouts' lease obligations and how they are incorporated into the company's financial statements. Prospective franchisees should understand these accounting practices, as they reflect how lease expenses will impact the financial performance of their franchised business.