According to Checkersrallys, what are the criteria that would classify a lease as a finance lease?
Checkersrallys Franchise · 2025 FDDAnswer from 2025 FDD Document
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.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 91)
What This Means (2025 FDD)
According to Checkersrallys' 2025 Franchise Disclosure Document, the company classifies lease arrangements as either operating leases or finance leases at the start of the lease. A lease is considered a finance lease if it meets at least one of five specific criteria.
The first criterion is if the lease transfers ownership of the asset to the lessee by the end of the lease term. The second is if the lease grants the lessee an option to purchase the asset that they are reasonably certain to exercise. The third is if the lease term covers a major portion of the asset's remaining economic life. The fourth is if the present value of the lease payments is equal to or exceeds almost all of the asset's fair value. Finally, the fifth criterion is if the asset is so specialized that the lessor would not expect it to have any alternative use when the lease ends.
If none of these five criteria are met, Checkersrallys classifies the lease as an operating lease. This classification is important because it affects how the lease is accounted for in Checkersrallys' financial statements. For prospective franchisees, understanding these classifications can be crucial when evaluating potential real estate leases for their restaurant locations, as it impacts their financial obligations and reported expenses.