When did Carls transition to ASC 842 for lease accounting?
Carls Franchise · 2024 FDDAnswer from 2024 FDD Document
of the following:
| Fi | scal 2023 | Fi | scal 2022 | |
|---|---|---|---|---|
| Series 2018-1 Class A-2 Notes | S | 30,364 | $ | 31,280 |
| Series 2020-1 Class A-2 Notes | 15,643 | 16,111 | ||
| Series 2021-1 Class A-2 Notes | 5,092 | 3,116 | ||
| Amortization of deferred financing costs | 3,352 | 3,092 | ||
| Finance leases | 1,302 | 1,438 | ||
| Financing method sale-leaseback obligations (see Note 10) | 6,276 | 7,384 | ||
| Letter of credit fees, commitment fees and other | 871 | 882 | ||
| Total interest expense | $ | 62,900 | $ | 63,303 |
NOTE 9 — LEASES
We occupy land and buildings under lease agreements expiring on various dates through fiscal 2046. Many leases provide for future rent escalations and renewal options. In addition, variable lease payments such as a percentage of sales in excess of specified levels, is often required. Most leases obligate us to pay costs of maintenance, insurance and property taxes.
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 reasse
Source: Item 21 — FINANCIAL STATEMENTS (FDD pages 79–80)
What This Means (2024 FDD)
According to Carls's 2024 Franchise Disclosure Document, Carls transitioned to ASC 842 on February 1, 2022. This transition was performed on a modified retrospective basis using the effective date transition method. The adoption of ASC 842 requires Carls, as a lessee, to recognize assets and liabilities on the balance sheet for the rights and obligations created by finance and operating leases. It also amends various other aspects of accounting for leases by both lessees and lessors.
In connection with this transition, Carls elected a package of practical expedients. Specifically, Carls did not reassess the classification of existing leases, reevaluate whether any expired or existing contracts are or contain leases, or reassess initial direct costs under the new guidance. Additionally, Carls 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 the transition to ASC 842. However, Carls did not elect the practical expedient that permitted a reassessment of lease terms for existing leases.
The cumulative effect of Carls's transition to ASC 842 resulted in a $452 or $571 (thousands) adjustment to the February 1, 2022, accumulated deficit. This change represents a change in accounting principle and impacts how Carls reports its financial obligations related to leases. For a prospective franchisee, this means that Carls's financial statements from 2023 onward reflect the new lease accounting standards, while prior periods were prepared under the previous standards.