What accounting standards topic did Carls adopt regarding leases?
Carls Franchise · 2024 FDDAnswer from 2024 FDD Document
r the shorter of the estimated useful lives of the assets or the related lease terms. The amortization period for leasehold improvements includes renewal option periods only in instances in which the exercise of the renewal option is reasonably certain at the acquisition date because failure to exercise such option would result in an economic penalty.
We capitalize direct costs and interest costs associated with construction projects that have a future benefit. Ifwe subsequently make a determination that a site for which development costs have been capitalized will not be acquired or developed, any previously capitalized development costs are expensed and included in general and administrative expenses.
Leases
We transitioned to Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 842, "Leases" ("ASC 842"), from ASC Topic 840, "Leases" (the "Previous Standard") on February 1, 2022. Our Consolidated Financial Statements reflect the application of ASC 842 guidance beginning in 2023, while our Consolidated Financial Statements for the prior period were prepared under the guidance of the Previous Standard. See Note 9, Leases, for further information about our transition to this new lease guidance on a modified retrospective basis using the effective date transition method.
Lessor Accounting
We recognize lease payments for operating leases as property revenue on a straight-line basis over the lease term.
Source: Item 21 — FINANCIAL STATEMENTS (FDD pages 79–80)
What This Means (2024 FDD)
According to Carls' 2024 Franchise Disclosure Document, the company transitioned to Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 842, "Leases" (ASC 842) from ASC Topic 840, "Leases", effective February 1, 2022. The financial statements reflect the application of ASC 842 guidance beginning in 2023, while the prior period's financial statements were prepared under ASC Topic 840. Prospective franchisees should note that Carls elected a package of practical expedients, including not reassessing the classification of existing leases or reevaluating whether existing contracts contain leases.
Under ASC 842, when Carls is the lessee, it recognizes an operating lease asset and lease liability at the commencement of the lease. These are measured by discounting lease payments using the estimated risk-free rate as the discount rate. Carls elected to use the risk-free rate as its discount rate to determine the initial and subsequent measurement of operating lease liabilities, as allowed under Accounting Standards Update 2021-09. Subsequent amortization of the operating lease asset and accretion of the lease liability for an operating lease is recognized as a single lease cost on a straight-line basis over the lease term.
Before adopting ASC 842, under the previous standard, Carls did not recognize assets and liabilities for the rights and obligations created by operating leases. Instead, rental expenses for operating leases were recorded on a straight-line basis over the lease term. This change in accounting standards impacts how Carls reports its lease obligations and assets on its balance sheet, which may affect financial ratios and metrics that potential franchisees use to evaluate the company's financial health. Franchisees should consult with their financial advisors to understand the implications of this change.