What does a right-of-use asset represent regarding Benihana's operating leases?
Benihana Franchise · 2024 FDDAnswer from 2024 FDD Document
Contracts are evaluated to determine whether they contain a lease at inception. The Company's contracts determined to be or contain a lease include explicitly or implicitly identified assets where the Company has the right to substantially all of the economic benefits of the assets and has the ability to direct how and for what purpose the assets are used during the lease term. If it is determined that the contract contains an operating lease, a right-of-use asset and operating lease liability are recorded on the consolidated balance sheets. A right-of-use asset represents the Company's right to use the underlying asset and the lease liability represents the Company's contractually obligated payments. Both the right-of-use asset and the lease liability are recognized as of the commencement date of the lease and are based upon the present value of lease payments due over the course of the lease. The right-of-use asset is reduced by any lease incentives received. For leases that do not have a rate implicit in the lease, the Company's incremental borrowing rate at the date of commencement is used to determine the present value of the lease payments. The Company's incremental borrowing rate is the rate of interest that it would have to borrow on a collateralized basis over a similar term on an amount equal to the lease payments in a similar economic environment.
The Company enters into contracts to lease office and restaurant space with terms that expire at various dates through 2047. The lease term is the minimum of the noncancelable period of the lease or the lease term inclusive of reasonably certain renewal periods. The Company considers a number of factors when evaluating whether the options in its lease contracts were reasonably certain of exercise, such as length of time before option exercise, expected value of the leased asset at the end of the initial lease term, importance of the lease to overall operations, costs to negotiate a new lease, and any contractual or economic penalties.
Source: Item 22 — CONTRACTS (FDD pages 73–74)
What This Means (2024 FDD)
According to Benihana's 2024 Franchise Disclosure Document, a right-of-use asset represents the company's right to use an underlying asset, while the lease liability represents the company's contractually obligated payments. Both the right-of-use asset and the lease liability are recognized as of the commencement date of the lease and are based upon the present value of lease payments due over the course of the lease. The right-of-use asset is reduced by any lease incentives received.
For a Benihana franchisee, this means that when Benihana enters into an operating lease, it records both an asset (the right to use the leased property) and a liability (the obligation to make lease payments) on its balance sheet. The value of the right-of-use asset is initially determined by the present value of the lease payments, taking into account any lease incentives received. This accounting treatment provides a more transparent view of Benihana's lease obligations and assets.
If the lease does not have a rate implicit in the lease, Benihana uses its incremental borrowing rate at the date of commencement to determine the present value of the lease payments. Benihana's incremental borrowing rate is the rate of interest that it would have to borrow on a collateralized basis over a similar term on an amount equal to the lease payments in a similar economic environment. Benihana enters into contracts to lease office and restaurant space with terms that expire at various dates through 2047. The lease term is the minimum of the noncancelable period of the lease or the lease term inclusive of reasonably certain renewal periods. Benihana considers a number of factors when evaluating whether the options in its lease contracts were reasonably certain of exercise, such as length of time before option exercise, expected value of the leased asset at the end of the initial lease term, importance of the lease to overall operations, costs to negotiate a new lease, and any contractual or economic penalties.