What do the right-of-use assets represent for Aplus?
Aplus Franchise · 2024 FDDAnswer from 2024 FDD Document
At this time, the majority of active leases within our portfolio are classified as operating leases. Operating leases are included in operating lease right-of-use assets, net, operating lease current liabilities and operating lease non-current liabilities on our consolidated balance sheets. Finance leases represent a small portion of the active lease agreements and are included in other non-current assets and long-term debt, net on our consolidated balance sheets. 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, right-of-use assets represent Aplus's right to use an underlying asset for the lease term. Lease liabilities, on the other hand, represent Aplus's obligation to make minimum lease payments arising from the lease for the duration of the lease term. Most leases include options to renew, potentially extending the lease term from one year to 20 years or greater, with the exercise of these options typically at Aplus's discretion. Many leases also contain early termination clauses, which generally require agreement from both parties. At the beginning of the lease, Aplus considers all renewal options reasonably certain to be exercised when determining the lease term. Currently, Aplus does not have leases that include options to purchase or automatic transfer of ownership of the leased property to Aplus. 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, Aplus uses the implicit rate when it is readily determinable. However, since many of their leases do not provide an implicit rate, Aplus uses its 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 require additional contingent or variable lease payments based on factors specific to the individual agreement. Variable lease payments Aplus is typically responsible for include payment of real estate taxes, maintenance expenses, and insurance.
For a prospective Aplus franchisee, understanding these lease terms is crucial. The classification of leases as operating or finance leases impacts Aplus's balance sheets, with operating leases reflected in right-of-use assets and lease liabilities, while finance leases are included in other non-current assets and long-term debt. The potential for lease renewal and early termination clauses adds complexity, requiring careful consideration of the lease term and associated obligations. The method used to determine the present value of lease payments, whether based on the implicit rate or Aplus's incremental borrowing rate, affects the financial reporting of lease expenses. Additionally, the responsibility for variable lease payments, such as real estate taxes and maintenance, can significantly impact the overall cost of leasing. Franchisees should carefully review all lease agreements and understand their obligations for lease payments, renewals, and potential early termination costs.