How does Caring Transitions recognize lease expense for operating leases?
Caring_Transitions Franchise · 2025 FDDAnswer from 2025 FDD Document
necessary to determine the rate implicit in the lease and the Company's incremental borrowing rate is not readily available. Lease expense for operating leases is recognized on a straight-line basis over the lease term. Short-term leases are less than one year without purchase or renewal options that are reasonably certain to be exercised and are recognized on a straight-line basis over the lease term. The right-of-use asset is tested for impairment in accordance with ASC 360.
Subsequent events
The Company evaluates events and transactions occurring subsequent to the date of the financial statements for matters requiring recognition or disclosure in the financial statements. The accompanying financial statements consider events through March 24, 2025 the date on which the financial statements were available to be issued.
2. SHAREHOLDERS' EQUITY & NOTE PAYABLE:
At December 31, 2024, 2023 and 2022 there were 55 voting shares and 31 non-voting shares outstanding. In 2019, 14 non-voting shares were purchased back from a shareholder for $379,558. The purchase was recorded as a return of paid in capital of $12,030; the balance was reported as treasury shares. The purchase was financed with a note payable of $214,532. The note balance is payable over seven years at 3%. The note balance at December 31, 2024 is $44,412, due to be repaid as follows:
| 2025 | $ 33,137 |
|---|---|
| 2026 | 11,275 $ 44,412 |
**3.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 49)
What This Means (2025 FDD)
According to Caring Transitions' 2025 Franchise Disclosure Document, the company recognizes lease expenses for operating leases on a straight-line basis over the lease term. This means that the total lease expense is divided evenly over the entire period of the lease, resulting in a consistent expense amount each month or year. For leases shorter than one year without purchase or renewal options that are reasonably certain to be exercised, Caring Transitions also recognizes these on a straight-line basis over the lease term.
This accounting method provides a predictable and consistent expense for Caring Transitions, which can help in budgeting and financial planning. It also reflects the economic reality of using the leased asset over its entire life, rather than recognizing the entire expense upfront or only when cash payments are made. The company uses the risk-free rate for a period of time similar to the lease term, determined at the lease commencement date, in determining the present value of lease payments because the information necessary to determine the rate implicit in the lease and the Company's incremental borrowing rate is not readily available.
For a prospective Caring Transitions franchisee, understanding this accounting practice is important for interpreting the company's financial statements and comparing its financial performance to other franchise opportunities. Additionally, the FDD states that total operating lease expense for the years ended December 31, 2024, 2023, and 2022 was $151,909, $147,877 and $140,779, respectively. This information can be useful in forecasting their own potential lease expenses and assessing the overall financial health of the Caring Transitions franchise system.
It's worth noting that variable lease costs, such as the company's proportionate share of actual costs for utilities, common area maintenance, property taxes and insurance that are not included in the lease liability, are recognized in the period in which they are incurred. The company has no leases with variable costs or short-term leases at December 31, 2024.