How does Carls recognize the amortization of the operating lease asset and accretion of the lease liability for an operating lease?
Carls Franchise · 2024 FDDAnswer from 2024 FDD Document
We recognize an operating lease asset and lease liability at lease commencement, which are measured by discounting lease payments using the estimated risk free rate as the discount rate. We made an accounting policy election to use the risk-free rate as our discount rate to determine the initial and subsequent measurement of operating lease liabilities. 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. Reductions to the operating lease asset and the change in the lease liability are included in changes in operating lease assets and liabilities, net in the Consolidated Statement of Cash Flows.
Source: Item 21 — FINANCIAL STATEMENTS (FDD pages 79–80)
What This Means (2024 FDD)
According to Carls's 2024 Franchise Disclosure Document, when Carls is the lessee, the company recognizes an operating lease asset and lease liability when the lease commences. These are measured by discounting lease payments using the estimated risk-free rate as the discount rate. Carls has elected to use the risk-free rate as its discount rate to determine the initial and subsequent measurement of operating lease liabilities.
Following the commencement of the lease, the subsequent amortization of the operating lease asset and the accretion of the lease liability are recognized as a single lease cost. This cost is recognized on a straight-line basis over the lease term. This means that the expense is evenly distributed throughout the duration of the lease.
Furthermore, any reductions to the operating lease asset and changes in the lease liability are included in changes in operating lease assets and liabilities, net in the Consolidated Statement of Cash Flows. This indicates that these changes are accounted for in the company's cash flow statements, providing transparency in how these lease-related activities impact Carls's overall financial position.
This accounting treatment is in accordance with ASC 842, which Carls adopted beginning in 2023. Prior to this, under ASC 840, Carls did not recognize assets and liabilities for operating leases, instead recording rental expense on a straight-line basis.