How does Carls recognize lease payments for operating leases?
Carls Franchise · 2024 FDDAnswer from 2024 FDD Document
iods 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. If we 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
Lessor Accounting
We recognize lease payments for operating leases as property revenue on a straight-line basis over the lease term. We recognize variable lease payment income for operating leases in the period when changes in facts and circumstances on which the variable lease payments are based occur. We recognize variable lease payment income for operating and financing leases in the period when changes in facts and circumstances on which the variable lease payments are based occur.
Lessee Accounting
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.
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 lessor, it recognizes lease payments for operating leases as property revenue on a straight-line basis over the lease term. Additionally, Carls recognizes variable lease payment income for operating leases in the period when changes in facts and circumstances on which the variable lease payments are based occur.
When Carls is the lessee, it recognizes an operating lease asset and lease liability at lease commencement, 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 for determining 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 changes in the lease liability are included in changes in operating lease assets and liabilities, net in the Consolidated Statement of Cash Flows. Carls also reassesses lease classification and remeasures assets and lease liabilities when a lease is modified and that modification is not accounted for as a separate contract or upon certain other events that require reassessment in accordance with ASC 842. Variable lease costs for operating and finance leases are recognized in the period when changes in facts and circumstances on which the variable lease payments are based occur.
This accounting treatment means that Carls spreads the cost of the lease evenly over the lease term, providing a consistent expense recognition in its financial statements. For a franchisee, understanding these lease accounting practices is important because it affects how Carls reports its financial performance, which can influence decisions related to franchise operations and investments.