What do the lease liabilities represent for Aplus?
Aplus Franchise · 2024 FDDAnswer from 2024 FDD Document
The right-of-use assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make minimum lease payments arising from the lease for the duration of the lease term.
Most leases include one or more options to renew, with renewal terms that can extend the lease term from one year to 20 years or greater. The exercise of lease renewal options is typically at our discretion. Additionally, many leases contain early termination clauses, however early termination typically requires the agreement of both parties to the lease. At lease inception, all renewal options reasonably certain to be exercised are considered when determining the lease term. At this time, the Partnership does not have leases that include options to purchase or automatic transfer of ownership of the leased property to the Partnership. The depreciable life of leased assets and leasehold improvements are limited by the expected lease term.
To determine the present value of future minimum lease payments, we use the implicit rate when readily determinable. At this time, many of our leases do not provide an implicit rate, therefore to determine the present value of minimum lease payments we use our incremental borrowing rate based on the information available at lease commencement date. The right-of-use assets also include any lease payments made and exclude lease incentives.
Minimum rent payments are expensed on a straight-line basis over the term of the lease. In addition, some leases may require additional contingent or variable lease payments based on factors specific to the individual agreement. Variable lease payments we are typically responsible for include payment of real estate taxes, maintenance expenses and insurance.
Source: Item 22 — CONTRACTS (FDD page 68)
What This Means (2024 FDD)
According to Aplus's 2024 Franchise Disclosure Document, lease liabilities represent the company's obligation to make minimum lease payments arising from the lease for the duration of the lease term. The majority of Aplus's active leases are classified as operating leases, which are included in operating lease right-of-use assets, net operating lease current liabilities, and operating lease non-current liabilities on their consolidated balance sheets. A smaller portion of their active lease agreements are finance leases, which are included in other non-current assets and long-term debt, net on their consolidated balance sheets.
Most of Aplus's leases include options to renew, potentially extending the lease term from one year to 20 years or more, typically at the company's discretion. Many leases also have early termination clauses, though these usually require agreement from both parties. When determining the lease term, Aplus considers all renewal options reasonably certain to be exercised at the beginning of the lease. Currently, Aplus does not have leases that include options to purchase or automatic transfer of ownership of the leased property to the Partnership. The depreciable life of leased assets and leasehold improvements is limited by the expected lease term.
To determine the present value of future minimum lease payments, Aplus uses the implicit rate when it is readily determinable. However, since many of their leases do not provide an implicit rate, they use their incremental borrowing rate based on available information at the lease commencement date to determine the present value of minimum lease payments. The right-of-use assets also include any lease payments made and exclude lease incentives. Minimum rent payments are expensed on a straight-line basis over the term of the lease. Some leases may also require additional contingent or variable lease payments based on factors specific to the individual agreement, such as real estate taxes, maintenance expenses, and insurance.