For Bath Tune Up, what lease terms trigger the recognition of lease assets and liabilities?
Bath_Tune_Up Franchise · 2025 FDDAnswer from 2025 FDD Document
Lease assets and related lease liabilities are recognized for the rights and obligations created at lease commencement by operating and finance leases with lease terms of more than 12 months. The lease term commences on the date the lessor makes the underlying asset(s) available, irrespective of when lease payments begin under the contract. When determining lease term at commencement, the Company considers termination and renewal option periods available, and only includes these in the lease term if the Company is reasonably certain it will exercise the options.
The lease liability is generally based on the present value of the lease payments, consisting of fixed costs and certain rent escalations, using the risk-free rate applicable to the lease term. The lease asset is generally based on the lease liability, adjusted for amounts related to other lease-related assets and liabilities, that may include prepaid rent, landlord contributions as a reduction to the asset, and favorable or unfavorable lease purchase price adjustments.
The Company chose the private-company election to use the risk-free treasury rate at the lease commencement date for the duration of the remaining lease term to discount the present value of the future minimum lease payments.
Lease asset carrying amounts are assessed for impairment when events or circumstances indicate that the carrying amount may not be recoverable. The Company monitors for events or changes in circumstances that require reassessment of lease classification. When a reassessment results in the re-measurement of a lease liability, a corresponding adjustment is made to the carrying amount of the lease asset.
Variable lease costs, consisting primarily of property taxes, insurance, and maintenance expenses, are expensed as incurred in Operating and administrative on the Statements of Operations and are not included in lease liabilities on the Balance Sheets.
Lease expenses are recognized on a straight-line basis over the lease term in Operating and administrative on the Statements of Operations.
Source: Item 21 — FINANCIAL STATEMENTS (FDD pages 51–52)
What This Means (2025 FDD)
According to Bath Tune Up's 2025 Franchise Disclosure Document, the company recognizes lease assets and related lease liabilities for operating and finance leases that have lease terms exceeding 12 months. This recognition occurs at the lease commencement, which is defined as the date the lessor makes the underlying assets available for use, regardless of when the lease payments actually begin. When Bath Tune Up determines the lease term at the start of the lease, it considers any termination and renewal options, including these options in the lease term only if it is reasonably certain that the company will exercise them.
The lease liability is based on the present value of the lease payments, including fixed costs and certain rent escalations, discounted using the risk-free rate applicable to the lease term. The lease asset is generally based on the lease liability, adjusted for other lease-related items such as prepaid rent, landlord contributions (reducing the asset), and adjustments for favorable or unfavorable lease purchase prices. Bath Tune Up uses the risk-free treasury rate at the lease commencement date for the duration of the remaining lease term to discount the present value of the future minimum lease payments.
Bath Tune Up assesses the carrying amounts of lease assets for impairment when events or circumstances suggest that the carrying amount may not be recoverable. The company also monitors for events or changes that require reassessment of lease classification. If a reassessment results in re-measurement of a lease liability, a corresponding adjustment is made to the carrying amount of the lease asset. Variable lease costs, such as property taxes, insurance, and maintenance expenses, are expensed as incurred and are not included in lease liabilities on the balance sheets. Lease expenses are recognized on a straight-line basis over the lease term.