How does Checkers classify its leases, as operating or finance leases?
Checkers Franchise · 2025 FDDAnswer from 2025 FDD Document
the Company is obligated under certain 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.
The Company classifies its lease arrangements at inception as either operating leases or finance leases. A lease is classified as a finance lease if at least one of the following criteria is met: (1) the lease transfers ownership of the underlying asset to the lessee, (2) the lease grants the lessee an option to purchase the underlying asset that the lessee is reasonably certain to exercise, (3) the lease term is for a major part of the remaining economic life of the underlying asset, (4) the present value of the sum of the lease payments equals or exceeds substantially all of the fair value of the underlying asset, or (5) the underlying asset is of such a specialized nature that it is expected to have no alternative use to the lessor at the end of the lease term. A lease is classified as an operating lease if none of the five criteria described above for finance lease classification is met. We determine if an arrangement is a lease at inception of the contract. Our right-ofuse ("ROU") assets represents our right to use the underlying assets for the lease term and our lease liabilities represent our obligation to make lease payments arising from the leases. ROU assets and lease liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. The Company's lease arrangements consist of real estate operating and finance leases for restaurant locations and corporate office space.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The Company uses judgment to determine the lease term, which in turn, impacts the applicable incremental borrowing rate ("IBR") used to calculate the initial lease liability.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 91)
What This Means (2025 FDD)
According to Checkers' 2025 Franchise Disclosure Document, the company classifies its leases as either operating leases or finance leases. The classification depends on whether the lease agreement meets specific criteria. A lease is considered a finance lease if it transfers ownership of the asset to the lessee, grants the lessee an option to purchase the asset, covers a major part of the asset's economic life, has a present value of lease payments that substantially equals the asset's fair value, or involves a specialized asset with no alternative use for the lessor at the end of the term. If none of these criteria are met, the lease is classified as an operating lease.
Checkers determines lease classification at the beginning of the contract. The company's right-of-use (ROU) assets represent its right to use the underlying assets for the lease term, while lease liabilities represent the obligation to make lease payments. Both ROU assets and lease liabilities are recognized at the commencement date, based on the present value of lease payments over the lease term. The company's lease arrangements include both real estate operating and finance leases for restaurant locations and corporate office space.
For the fiscal year ended December 30, 2024, Checkers experienced an increase of approximately $8.2 million in Finance lease right-of-use assets and an increase of approximately $7.1 million in Finance lease liabilities, primarily due to renewals of existing finance lease arrangements for land properties. Checkers also wrote off ROU operating lease assets in the amount of $0.4 million for the fiscal year ended December 30, 2024, due to stores that closed during the period. These classifications and accounting treatments are in accordance with ASC 842, Leases.
For a potential Checkers franchisee, understanding the lease classification is crucial because it impacts the financial statements. Finance leases are treated differently than operating leases, affecting the balance sheet with the recognition of right-of-use assets and lease liabilities. The classification also influences the income statement through amortization and interest expenses. Franchisees should carefully review their lease agreements and consult with financial professionals to understand the implications of lease classifications on their business.