How does 7 Brew determine if an arrangement is a lease or contains a lease?
7_Brew Franchise · 2025 FDDAnswer from 2025 FDD Document
The Company determines if an arrangement is a lease or contains a lease at inception. Leases result in the recognition of Right-of-use ("ROU") assets and Lease liabilities on the Balance Sheets. ROU assets represent the right to use an underlying asset for the lease term, and lease liabilities represent the obligation to make lease payments arising from the lease, measured on a discounted basis. The Company determines lease classification as operating or finance at the lease commencement date.
The Company accounts for the lease and non-lease components, if any, separately. The lease components consist of the buildings. The Company allocates the consideration to the lease and non-lease components using their relative standalone values.
At lease inception, the lease liability is measured at the present value of the lease payments over the lease term. The ROU asset equals the lease liability adjusted for any initial direct costs, prepaid or deferred rent, and lease incentives. The Company uses the implicit rate when readily determinable. As most of the leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the commencement date to determine the present value of lease payments.
Lease expense is generally recognized on a straight-line basis over the lease term.
The Company has elected not to record leases with an initial term of 12 months or less on the Balance Sheets. Lease expense on such leases is recognized on a straight-line basis over the lease term.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 82)
What This Means (2025 FDD)
According to 7 Brew's 2025 Franchise Disclosure Document, the company determines if an arrangement is a lease or contains a lease at the beginning of the agreement. Leases lead to the recognition of Right-of-use (ROU) assets and Lease liabilities on the balance sheets. ROU assets are the right to use an underlying asset for the lease term. Lease liabilities are the obligation to make lease payments arising from the lease, measured on a discounted basis. At the lease commencement date, 7 Brew determines lease classification as operating or finance.
7 Brew accounts for the lease and non-lease components separately, if any. The lease components consist of the buildings. 7 Brew allocates the consideration to the lease and non-lease components using their relative standalone values. At the beginning of the lease, the lease liability is measured at the present value of the lease payments over the lease term. The ROU asset equals the lease liability adjusted for any initial direct costs, prepaid or deferred rent, and lease incentives.
7 Brew uses the implicit rate when readily determinable. As most of the leases do not provide an implicit rate, 7 Brew uses its incremental borrowing rate based on the information available at the commencement date to determine the present value of lease payments. Lease expense is generally recognized on a straight-line basis over the lease term. 7 Brew has elected not to record leases with an initial term of 12 months or less on the Balance Sheets. Lease expense on such leases is recognized on a straight-line basis over the lease term.