How does Burger King determine the incremental borrowing rate applicable to each lease?
Burger_King Franchise · 2025 FDDAnswer from 2025 FDD Document
A finance lease ROU asset is depreciated on a straight-line basis over the lesser of the useful life of the leased asset or lease term. Interest on each finance lease liability is determined as the amount that results in a constant periodic discount rate on the remaining balance of the liability. Operating lease and finance lease ROU assets are assessed for impairment in accordance with our long-lived asset impairment policy.
We reassess lease classification and remeasure ROU assets and lease liabilities when a lease is modified and that modification is not accounted for as a separate contract or upon certain other events that require reassessment. Maintenance and property tax expenses are accounted for on an accrual basis as variable lease cost.
We recognize variable lease cost in the period when changes in facts and circumstances on which the variable lease payments are based occur.
Source: Item 20 — OUTLETS AND FRANCHISEE INFORMATION (FDD pages 109–124)
What This Means (2025 FDD)
According to Burger King's 2025 Franchise Disclosure Document, the interest on each finance lease liability is determined by calculating the amount that results in a constant periodic discount rate on the remaining balance of the liability. This means that Burger King uses a consistent discount rate over the lease term to calculate the interest expense for each period. This method ensures that the interest expense is recognized in a way that reflects the economic substance of the lease.
For a prospective Burger King franchisee, understanding how lease liabilities are calculated is crucial because it affects the reported financial performance of the franchise. The constant periodic discount rate helps in smoothing out the interest expense over the lease term, providing a more predictable expense pattern. This can aid in budgeting and financial forecasting for the franchisee.
It's also important to note that Burger King reassesses lease classifications and remeasures right-of-use (ROU) assets and lease liabilities when a lease is modified, unless the modification is accounted for as a separate contract, or upon certain other events that require reassessment. This means that changes to the lease terms could result in adjustments to the lease accounting, impacting the franchisee's financial statements. Additionally, maintenance and property tax expenses are accounted for on an accrual basis as variable lease costs, which are recognized in the period when changes in the facts and circumstances on which the variable lease payments are based occur.