What does Checkers' right-of-use (ROU) assets represent?
Checkers Franchise · 2025 FDDAnswer from 2025 FDD Document
lable 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.
Favorable and Unfavorable Leasehold Interests
Prior to the adoption of ASC 842 on January 4, 2022, favorable and unfavorable leasehold interests, which occur when leases that are assumed in a business combination have contractual payments that are below or above market rental rates, are amortized using the straight-line method over the remaining term of the lease, including any renewal periods that are reasonably certain to be exercised. For the fiscal year ended January 3, 2022, the favorable and unfavorable leasehold interests for lease agreements where the Company was the lessee or lessor, were captured in "favorable leasehold interests" and "unfavorable leasehold interests" in the accompanying consolidated balance sheet.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 91)
What This Means (2025 FDD)
According to Checkers' 2025 Franchise Disclosure Document, right-of-use (ROU) assets represent the company's rights to use an asset for a specified period. These assets are recognized on the balance sheet as a result of adopting ASC 842 - Leases.
Specifically, upon adopting ASC 842 on January 4, 2022, 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%. This was accompanied by an operating right-of-use asset of $193.6 million. Additionally, they recognized a financing lease liability of $0.6 million, discounted using interest rates from 2.71% to 3.00%, and a financing right-of-use asset of $0.3 million. These ROU assets and liabilities reflect Checkers' obligations and rights related to leased properties and equipment.
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. However, the company also wrote off ROU operating lease assets in the amount of $0.4 million for the fiscal year ended December 30, 2024, and $0.4 million for the period from June 17, 2023, through January 1, 2024, due to store closures. Further, the Company wrote-off ROU operating lease assets in the amount of $2.9 million in the period from January 3, 2023 through June 16, 2023. These write-offs indicate that some locations were not profitable and were not projected to become profitable, leading to the impairment of the associated lease assets.
In practical terms, ROU assets are a significant component of Checkers' financial statements, reflecting the value of their leased properties and equipment. Franchisees should be aware that Checkers monitors its lease obligations and ensures compliance with relevant accounting standards. The write-offs of ROU assets due to store closures highlight the risk associated with lease obligations, particularly if a location becomes unprofitable. Prospective franchisees may want to inquire about the factors that contribute to store profitability and the support Checkers provides to ensure the financial viability of franchise locations.