Did Carls elect the practical expedient that permitted a reassessment of lease terms for existing leases when transitioning to ASC 842?
Carls Franchise · 2024 FDDAnswer from 2024 FDD Document
We transitioned to ASC 842 on February 1, 2022 on a modified retrospective basis using the effective date transition method. The new guidance requires lessees to recognize on the balance sheet the assets and liabilities for the rights and obligations created by finance and operating leases and amends various other aspects of accounting for leases by lessees and lessors. In connection with our transition to ASC 842, we elected the package of practical expedients under which we did not reassess the classification of our existing leases, reevaluate whether any expired or existing contracts are or contain leases or reassess initial direct costs under the new guidance. We also elected lessee and lessor practical expedients to not separate non-lease components comprised of maintenance from lease components for real estate leases that commenced prior to our transition to ASC 842. We did not elect the practical expedient that permitted a reassessment of lease terms for existing leases.
Source: Item 21 — FINANCIAL STATEMENTS (FDD pages 79–80)
What This Means (2024 FDD)
According to Carls's 2024 Franchise Disclosure Document, when transitioning to ASC 842 on February 1, 2022, Carls did not elect the practical expedient that permitted a reassessment of lease terms for existing leases. Instead, Carls chose a modified retrospective basis using the effective date transition method.
Carls elected a package of practical expedients where they did not reassess the classification of their existing leases, reevaluate whether any expired or existing contracts are or contain leases, or reassess initial direct costs under the new guidance. Carls also elected lessee and lessor practical expedients to not separate non-lease components comprised of maintenance from lease components for real estate leases that commenced prior to their transition to ASC 842.
This means that Carls maintained the existing lease terms and conditions as they were originally agreed upon, without applying the new ASC 842 standards retroactively to modify those terms. For a franchisee, this indicates that Carls has chosen to simplify the transition to the new lease accounting standards by grandfathering in the terms of existing leases.