What is Benihana's incremental borrowing rate used for in the context of operating leases?

According to Benihana's 2024 Franchise Disclosure Document, when Benihana enters into operating leases, it recognizes a lease liability equivalent to the present value of the remaining lease payments and a right-of-use asset equal to this lease liability, with some adjustments for items like prepaid rents or lease incentives. The incremental borrowing rate is used to determine the present value of the lease payments for leases that do not have a rate implicit in the lease.

Benihana's incremental borrowing rate is defined as the interest rate the company would have to pay to borrow an amount equal to the lease payments on a collateralized basis over a similar term in a similar economic environment. This rate is used to discount the future lease payments to their present value, which is a common accounting practice to reflect the time value of money.

For a prospective Benihana franchisee, understanding how the company calculates and uses its incremental borrowing rate is important because it affects how lease liabilities and right-of-use assets are reported on Benihana's financial statements. This can impact various financial metrics and ratios that franchisees and investors use to assess the company's financial health and performance. Additionally, the lease term is determined by the non-cancellable period, including potential extensions or terminations, which can also affect these calculations.