What practical expedients did Checkers elect to adopt when implementing the new lease standard?
Checkers Franchise · 2025 FDDAnswer from 2025 FDD Document
der the new standard, (b) whether classification of capital leases or operating leases would be different in accordance with the new guidance, or (c) whether the unamortized initial direct costs before transition adjustments would have met the definition of initial direct costs in the new guidance at lease commencement.
The Company elected to adopt the available practical expedient to use hindsight in determining the lease term and in assessing impairment of the Company's right-of-use assets.
As both lessee and lessor, the Company elected the practical expedient to not separate lease and non-lease components, such as common area maintenance fees, by class of underlying asset and is applying this expedient to all relevant classes.
The Company elected the risk-free rate policy election and accordingly uses the rate implicit in the lease or the yield on United States treasury bonds for the related term to discount the lease payments based on information available at lease commencement. The Company records the related right-of-use assets and right-of-use liabilities at commencement at the present value of lease payments. As of January 1, 2024 and January 2, 2023, the Company does not have any operating or finance leases for which it is obligated that have not yet commenced.
As a result of adopting ASC 842 - Leases, the Company recognized on January 4, 2022, an operating lease liability of $229.6 million which represents the present value of the remaining operating lease payments, discounted using a risk-free interest rate ranging from 0.77% to 2.07% and an operating right-of-use asset of $193.6 million. The Company also recognized a financing lease liability of $0.6 million, discounted using a risk-free interest rate ranging from 2.71% to 3.00% and a financing right-of-use asset of $0.3 million. There was a cumulative adjustment of $38.6 million recorded to beginning retained earnings on January 4, 2022.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 91)
What This Means (2025 FDD)
According to Checkers' 2025 Franchise Disclosure Document, when adopting ASC 842 - Leases, Checkers elected certain practical expedients to simplify the implementation. Specifically, Checkers chose to use hindsight when determining the lease term and assessing impairment of right-of-use assets. This means Checkers could look back at actual outcomes to inform their accounting estimates, potentially reducing uncertainty.
Additionally, Checkers elected not to separate lease and non-lease components, such as common area maintenance fees, across all relevant asset classes. This simplifies accounting by treating these combined payments as a single lease component. Checkers also adopted a risk-free rate policy, using the rate implicit in the lease or the yield on United States treasury bonds to discount lease payments, based on information available when the lease commenced.
Furthermore, Checkers adopted a package of practical expedients, which allowed them to account for existing capital and operating leases under the new guidance without reassessing whether the contracts contained leases, whether the classification of leases would change, or whether unamortized initial direct costs met the new definition of initial direct costs. These elections streamline the transition to the new lease standard for Checkers, reducing the complexity and cost of implementation. For a franchisee, this means that Checkers' financial statements reflect these simplified accounting methods, which could impact how the franchisee interprets the financial health and lease obligations of the company.