What is the objective of Accounting Standards Update 2016-02, Leases, that Canopy Lawn Care adopted?
Canopy_Lawn_Care Franchise · 2025 FDDAnswer from 2025 FDD Document
ion of New Accounting Policies
Accounting Standards Update 2016-02, Leases
Effective October 1, 2022, the Company adopted Accounting Standards Update ("ASU") 2016-02, Leases (Topic 842). The objective of this ASU is to increase transparency and comparability in financial reporting by requiring balance sheet recognition of leases and note disclosure of certain information about lease arrangements. The Company adopted ASU 2016-02 using the modified retrospective method. This method allows the standard to be applied retrospectively through a cumulative catch-up adjustment to equity recognized upon adoption, if necessary. Adoption of ASU 2016-02 did not result in changes to the Company's beginning equity balance on October 1, 2022. Upon adoption, the Company elected to use risk-free discount rate, an option only available to private entities, when calculating the present value of future lease payments if an interest rate is not explicit in a lease agreement.
Adoption of this ASU resulted in the Company recording right-of-use ("ROU") assets of $3,397,752 and corresponding operating lease liabilities of $3,953,689 on October 1, 2022 which represents the present value of future lease payments on the Company's office and warehouse leases further detailed in Note 8 at the date of adoption. The difference in ROU asset and operating lease liability at inception is due to a deferred rent and certain tenant allowances of $555,937 at October 1, 2022 which has been netted against the ROU asset.
Accounting Standards Update 2013-03, Financial Instruments – Credit Losses
Effective October 1, 2023, the Company adopted the requirements of ASU 2013-03, Financial Instruments – Credit Losses. This ASU introduces a "current expected credit loss" ("CECL") model which requires all expected credit losses for financial instruments held at the reporting date to be based on historical experience, current conditions, and reasonable supportable forecasts. The CECL model replaces the existing incurred loss method and is applicable to the measurement of credit losses of financial assets.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 55)
What This Means (2025 FDD)
According to Canopy Lawn Care's 2025 Franchise Disclosure Document, the company adopted Accounting Standards Update (ASU) 2016-02, Leases (Topic 842) effective October 1, 2022. The primary objective of this ASU is to enhance transparency and comparability in financial reporting. This is achieved by mandating the recognition of leases on the balance sheet and requiring detailed note disclosures regarding lease arrangements.
For Canopy Lawn Care, the adoption of ASU 2016-02 resulted in recording right-of-use (ROU) assets of $3,397,752 and corresponding operating lease liabilities of $3,953,689 as of October 1, 2022. These figures represent the present value of future lease payments for the company's office and warehouse leases. The difference between the ROU asset and the operating lease liability, amounting to $555,937, is attributed to deferred rent and certain tenant allowances, which were netted against the ROU asset.
The adoption of this standard did not require any adjustments to Canopy Lawn Care's beginning equity balance on October 1, 2022. The company also elected to use a risk-free discount rate, an option available to private entities, when calculating the present value of future lease payments if a specific interest rate was not outlined in the lease agreement. In 2024, Canopy Lawn Care obtained additional ROU assets through operating leases of approximately $484,000.