What rate does Checkers use to determine the present value of lease liabilities?
Checkers Franchise · 2025 FDDAnswer from 2025 FDD Document
he 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.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 91)
What This Means (2025 FDD)
According to Checkers' 2025 Franchise Disclosure Document, Checkers determines the present value of lease payments by using the rate implicit in the lease or the yield on United States Treasury bonds for the related term. This is based on information available when the lease commences. The company also elected the risk-free rate policy.
For instance, when adopting ASC 842 - Leases, Checkers recognized an operating lease liability of $229.6 million on January 4, 2022. This was calculated using a risk-free interest rate ranging from 0.77% to 2.07%. They also recognized a financing lease liability of $0.6 million, discounted using a risk-free interest rate ranging from 2.71% to 3.00%.
Furthermore, Checkers uses judgment to determine the lease term, which impacts the incremental borrowing rate (IBR) used to calculate the initial lease liability. Management determined the present value of the lease liabilities by using the risk-free rate private company practical expedient which allows the Company to use the US Treasury rate most applicable to the lease term.
For a prospective franchisee, this means that the interest rate used to calculate lease liabilities can vary depending on the specific terms of the lease and prevailing interest rates at the time the lease is established. Understanding these rates is crucial for assessing the financial obligations associated with leasing property for a Checkers franchise.