What do Bor Restoration's right-of-use (ROU) assets and lease liabilities reflect?
Bor_Restoration Franchise · 2024 FDDAnswer from 2024 FDD Document
, franchises are required to pay royalty fees which are charged at the franchise level and determined based on a percentage of monthly gross sales. If the minimum levels of revenues are not achieved, a fixed fee is charged. These fees are billed and recognized when earned on a monthly basis.
Technology and Franchise Support Fees
Franchises are required to purchase on-going training, software and support fees. These fees are billed and considered fully earned on a monthly basis.
Notes To Financial Statements For The Years Ended December 31, 2023, 2022 and 2021
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Leases
The Company determines if an arrangement is or contains a lease at inception. Leases are included in right-of-use (ROU) assets and lease liabilities on the balance sheets. ROU assets and lease liabilities reflect the present value of the future minimum lease payments over the lease term, and ROU assets also include prepaid or accrued rent. Operating lease expense is recognized on a straight-line basis over the lease term. The Company does not report ROU assets and lease liabilities for its short-term leases (leases with a term of 12 months or less). Instead, the lease payments of those leases are reported as lease expense on a straight-line basis over the lease term.
Subsequent Events
The Company has performed an evaluation of subsequent events through March 26, 2024, which is the date the financial statements were available to be issued, and has considered any relevant matters in the preparation of the financial statements and footnotes.
Source: Item 23 — Receipts (FDD pages 40–202)
What This Means (2024 FDD)
According to Bor Restoration's 2024 Franchise Disclosure Document, the company includes leases in right-of-use (ROU) assets and lease liabilities on its balance sheets. These ROU assets and lease liabilities represent the present value of the future minimum lease payments over the lease term. Additionally, the ROU assets also account for any 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, which are leases 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.
Specifically, Bor Restoration's operating lease is a noncancellable lease for office space that commenced on August 1, 2021, and continues through July 31, 2024. 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%.
For a prospective Bor Restoration franchisee, this means that any lease agreements they enter into for their business operations will be reflected on the company's balance sheets as both an asset (the right to use the property) and a liability (the obligation to make lease payments). The value of these assets and liabilities is determined by the present value of the future lease payments, discounted using a risk-free rate. This accounting treatment provides a more transparent view of the company's financial obligations related to its leases. Franchisees should be aware of the lease terms and payment obligations, as these will impact the company's financial statements.