What is included in Bor Restoration's lease liabilities?
Bor_Restoration Franchise · 2024 FDDAnswer from 2024 FDD Document
The Company evaluated current contracts to determine which met the criteria of a lease. The ROU asset represents the Company's right to use the underlying asset for the lease term, and the lease liability represents the Company's obligation to make lease payments arising from the lease. The ROU asset and lease liability, all of which arise from an operating lease, were calculated based on the present value of the future minimum lease payments over the lease term. The Company made an accounting policy election to use a risk-free rate in lieu of its current incremental borrowing rate to discount future lease payments. The weighted average discount rate applied to calculate lease liabilities as of December 31, 2023, was 6%.
Source: Item 23 — Receipts (FDD pages 40–202)
What This Means (2024 FDD)
According to Bor Restoration's 2024 Franchise Disclosure Document, lease liabilities include the present value of future minimum lease payments over the lease term. These liabilities, along with right-of-use (ROU) assets, are reported on Bor Restoration's balance sheets. The ROU assets also account for prepaid or accrued rent.
Bor Restoration recognizes operating lease expenses on a straight-line basis throughout the lease term. However, the company does not report ROU assets and lease liabilities for short-term leases, defined as those with a term of 12 months or less. Instead, the lease payments for these short-term leases are reported as lease expenses on a straight-line basis over the lease term.
For example, Bor Restoration's operating lease for office space, which commenced on August 1, 2021, and extends through July 31, 2024, is considered a noncancellable lease. The company uses a risk-free rate instead of its current incremental borrowing rate to discount future lease payments when calculating the ROU asset and lease liability. As of December 31, 2023, the weighted average discount rate applied to calculate lease liabilities was 6%.
For a prospective Bor Restoration franchisee, understanding these lease accounting practices is crucial, especially when evaluating the financial health of the company. Franchisees should be aware of how lease liabilities are calculated and reported, as this can impact the perceived profitability and stability of the franchise.