What accounting standard did Checkers adopt on January 4, 2022, related to leases?
Checkers Franchise · 2025 FDDAnswer from 2025 FDD Document
16. Leases
The Company leases real estate for the operation of its restaurants as well as acts as a sublessor for the operation of certain franchised restaurants. As lessee, the Company is obligated under several noncancelable leases, primarily ground leases that in certain instances it also subleases to franchisees.
The Company accounts for leases as both a lessee and a lessor in accordance with ASC 842, Leases. For details on the Company's adoption of ASC 842, Leases and the related policy elections refer to Note 2. Results for reporting periods beginning on or after January 4, 2022 are presented under ASC 842, Leases. Prior period amounts were not revised and continue to be reported in accordance with ASC 840, Leases, the accounting standard then in effect.
Company as Lessee
The Company leases land and buildings generally under agreements with terms of, or renewable to, 10 to 30 years. The Company determines the lease term by assuming exercise of renewal options that are reasonably certain to be exercised. The leases are evaluated for classification as operating or finance leases.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 91)
What This Means (2025 FDD)
According to Checkers' 2025 Franchise Disclosure Document, the company adopted ASC 842, Leases, on January 4, 2022. This new accounting standard significantly changed how Checkers accounts for its leases, both as a lessee and a lessor. Results for reporting periods beginning on or after January 4, 2022, are presented under ASC 842, while prior period amounts were not revised and continue to be reported in accordance with ASC 840, the accounting standard then in effect.
As a result of adopting ASC 842, Checkers recognized an operating lease liability of $229.6 million, representing the present value of remaining operating lease payments, discounted using risk-free interest rates ranging from 0.77% to 2.07%. Additionally, Checkers recognized an operating right-of-use asset of $193.6 million. The company also recognized a financing lease liability of $0.6 million, discounted using risk-free interest rates ranging from 2.71% to 3.00%, and a financing right-of-use asset of $0.3 million. A cumulative adjustment of $38.6 million was recorded to beginning retained earnings on January 4, 2022.
For a potential Checkers franchisee, this means that the financial statements presented in the FDD reflect the updated accounting standards for leases. Understanding ASC 842 is crucial, as it impacts how lease obligations and assets are reported. Franchisees should be aware that these changes provide a more comprehensive view of Checkers' lease-related financial obligations and assets, which can affect financial ratios and overall financial health assessment. It's also important to note that Checkers elected certain practical expedients in applying ASC 842, such as not separating lease and non-lease components and using hindsight in determining the lease term and assessing impairment of right-of-use assets, which could influence the financial reporting outcomes.