How does 7 Brew measure the lease liability at the inception of a lease?
7_Brew Franchise · 2025 FDDAnswer from 2025 FDD Document
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, at the beginning of a lease, the lease liability is determined by calculating the present value of lease payments expected over the lease term. The right-of-use (ROU) asset is equivalent to this lease liability, but it is adjusted to account for any initial direct costs, prepaid or deferred rent, and any lease incentives received.
7 Brew typically uses the implicit interest rate within the lease agreement if it is readily available. However, the document states that most leases do not explicitly provide this rate. In such cases, 7 Brew uses its incremental borrowing rate, which is based on available information at the lease commencement date, to determine the present value of the lease payments. This incremental borrowing rate reflects the rate 7 Brew would have to pay to borrow funds necessary to acquire a similar asset over a similar term.
For franchisees, this means that the initial lease liability recognized on their balance sheet will significantly impact their financial statements. The present value calculation, influenced by the applicable interest rate, will determine the magnitude of this liability. Furthermore, 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.