How does Carls account for sublease payments received from franchisees for restaurants on leased sites?
Carls Franchise · 2024 FDDAnswer from 2024 FDD Document
ts measured at fair value on a non-recurring basis during fiscal 2023:
| Fair Value Measurements | Impairment Charges | |
|---|---|---|
| Assets to be disposed of (Level 2)(1) | $ — | $ 2,483 |
| Assets to be held and used (Level 3)(2) | $ — | $ 444 |
(1) Represents the impairment of long-lived assets including property & equipment, net and operating lease assets for multiple domestic company-operated closed restaurants.
**NOTE 14 — COMMITMENTS AND CONTINGENT LIABILITIE
Source: Item 21 — FINANCIAL STATEMENTS (FDD pages 79–80)
What This Means (2024 FDD)
According to Carls's 2024 Franchise Disclosure Document, many restaurants are on leased sites, and Carls may enter into sublease agreements with franchisees while remaining principally liable for the lease obligations. Carls accounts for sublease payments received from franchisees as rent revenue within franchised restaurants and other revenue. The corresponding lease payments are recorded as rent expense within franchised restaurants and other expense in the company's Combined Consolidated Statements of Income.
This accounting practice means that Carls recognizes both the income from subleasing to franchisees and the expense of their own lease obligations. This provides a clear picture of the financial impact of these lease arrangements on Carls's financial statements. As of January 31, 2024, the nominal value of the lease obligations under the remaining master leases' primary terms is $422,539.
For a prospective franchisee, this accounting treatment is important because it highlights Carls's ongoing financial commitments related to leased properties. While franchisees are subleasing from Carls, Carls remains the primary obligor to the landlord. This arrangement could have implications for the franchisee if Carls were to face financial difficulties, potentially affecting the stability of the sublease agreement. Franchisees should seek clarification on the specific terms of their sublease agreements and Carls's obligations under the master leases to fully understand their rights and responsibilities.