How does Auntie Annes classify leases at commencement when the company is a lessee?
Auntie_Annes Franchise · 2024 FDDAnswer from 2024 FDD Document
The Company leases SBR and corporate office locations. Certain leased locations are subleased to franchisees after refranchising transactions. The Company determines if an arrangement is a lease at contract inception. An agreement contains a lease if the contract conveys the right to control the use of identified property or equipment for a period of time in exchange for consideration. At commencement, the Company classifies each lease as either an operating or finance lease where the Company is a lessee, or as an operating, sales-type, or direct financing lease where the Company is a lessor. When determining the lease term, as both lessee and lessor, the Company includes option periods when it is reasonably certain that those options will be exercised.
Where the Company is a lessee, a lease liability and corresponding right-of-use asset are recognized on the lease commencement date based on the present value of the remaining lease payments over the lease term. Payments are discounted using the Company's incremental borrowing rate, as the rate implicit in the Company's leases is not readily determinable. Lease cost for operating leases is recognized on a straight-line basis. Most of the Company's leases are fixed rent agreements and require the Company to pay related executory costs which include property taxes, maintenance, and insurance. Certain leases for SBRs require the payment of additional contingent rent if SBR sales exceed amounts set forth in the lease agreements. Both the contingent rent and the executory costs are considered variable lease costs and are excluded from the measurement of the lease liability.
Source: Item 23 — RECEIPTS (FDD pages 106–366)
What This Means (2024 FDD)
According to Auntie Anne's 2024 Franchise Disclosure Document, when Auntie Anne's is a lessee, the company classifies each lease as either an operating or finance lease at the commencement of the lease. The determination is made at the beginning of the lease term, based on whether the agreement conveys the right to control the use of the identified property or equipment for a specific period in exchange for payment. This classification is a standard accounting practice to differentiate between leases that are essentially financing the asset (finance leases) and those that are more like renting the asset (operating leases).
Furthermore, Auntie Anne's recognizes a lease liability and a corresponding right-of-use asset on the lease commencement date. This recognition is based on the present value of the remaining lease payments over the lease term. The payments are discounted using the company's incremental borrowing rate because the rate implicit in the leases is not readily determinable. This means that Auntie Anne's estimates the cost of borrowing to determine the present value of the lease payments.
The lease cost for operating leases is recognized on a straight-line basis. Most of Auntie Anne's leases are fixed rent agreements that require the company to pay related executory costs, such as property taxes, maintenance, and insurance. Some leases for store locations require the payment of additional contingent rent if store sales exceed certain amounts specified in the lease agreements. Both the contingent rent and the executory costs are considered variable lease costs and are excluded from the measurement of the lease liability.