How does Carvel classify leases at commencement when the company is a lessee?
Carvel Franchise · 2025 FDDAnswer from 2025 FDD Document
mix based upon the respective agreements with the manufacturers, distributors, and the franchisees.
Company SBR revenues are recognized at the point of sale to the end customer, which is when the SBRs' performance obligation is satisfied. The Company presents revenues net of sales taxes collected from customers.
Franchise and other rental revenues includes rental revenue from properties leased and subleased to certain franchisees and other third parties. Base rental revenue is recognized on a straight-line basis over the lease term and contingent rental revenue is recognized as earned (see Note 6).
Advertising funds revenues are recognized as they are earned by the subsidiaries.
Leases
The Company leases SBR and corporate office locations. Certain leased locations are subleased to franchisees after refranchising transactions. The Company determines if an arrangement is a lease at contract inception. An agreement contains a lease if the contract conveys the right to control the use of identified property or equipment for a period of time in exchange for consideration. At commencement, the Company classifies each lease as either an operating or finance lease where the Company is a lessee, or as an operating, sales-type, or direct financing lease where the Company is a lessor. When determining the lease term, as both lessee and lessor, the Company includes option periods when it is reasonably certain that those options will be exercised.
Source: Item 23 — Receipts (FDD pages 100–353)
What This Means (2025 FDD)
According to Carvel's 2025 Franchise Disclosure Document, when Carvel is a lessee, it classifies each lease as either an operating or finance lease at the commencement date. The determination of the lease classification is made at the contract's inception, based on whether the agreement conveys the right to control the use of identified property or equipment for a period in exchange for consideration.
Carvel recognizes a lease liability and a corresponding right-of-use asset on the lease commencement date. This recognition is based on the present value of the remaining lease payments over the lease term. The payments are discounted using Carvel's incremental borrowing rate because the rate implicit in Carvel's leases is not readily determinable.
For operating leases, Carvel recognizes the lease cost on a straight-line basis. Most of Carvel's leases are fixed rent agreements that require Carvel to pay related executory costs, such as property taxes, maintenance, and insurance. Certain leases for SBRs (presumably store-based restaurants) require additional contingent rent if SBR sales exceed amounts specified in the lease agreements. Both the contingent rent and the executory costs are considered variable lease costs and are excluded from the measurement of the lease liability.