What accounting standards did Checkersrallys use for leases as of January 4, 2022?
Checkersrallys Franchise · 2025 FDDAnswer from 2025 FDD Document
The Company accounts for leases as both a lessee and a lessor in accordance with ASC 842, Leases. For details on the Company's adoption of ASC 842, Leases and the related policy elections refer to Note 2. Results for reporting periods beginning on or after January 4, 2022 are presented under ASC 842, Leases. Prior period amounts were not revised and continue to be reported in accordance with ASC 840, Leases, the accounting standard then in effect.
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.
Prior to the adoption of ASC 842, Leases, on January 4, 2022, the Company accounted for these refranchising transactions on an undiscounted basis in accordance with the provisions of ASC 840, which required the recognition of a reserve in the amount of the exposure under the sublease and recognition of the loss in the period the sublease was executed.
As part of the adoption of ASC 842, Leases, on January 4, 2022, reserves for restaurant retirement costs and sublease subsidies for lease agreements where the Company is the lessee are captured as an adjustment to the right-of-use assets at the time of transition.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 91)
What This Means (2025 FDD)
According to Checkersrallys's 2025 Franchise Disclosure Document, the company adopted ASC 842, Leases, on January 4, 2022. This affected how Checkersrallys accounts for its real estate leases for restaurant operations, where it acts as both a lessee and a sublessor. Prior to this date, Checkersrallys used ASC 840, Leases.
As a result of adopting ASC 842 on January 4, 2022, Checkersrallys 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%. They also recognized an operating right-of-use asset of $193.6 million. Additionally, Checkersrallys recognized a financing lease liability of $0.6 million, discounted using risk-free interest rates ranging from 2.71% to 3.00%, and a financing right-of-use asset of $0.3 million. A cumulative adjustment of $38.6 million was recorded to beginning retained earnings on January 4, 2022.
For a prospective Checkersrallys franchisee, this means that the financial statements from January 4, 2022, onward reflect the updated accounting standards for leases. Understanding the impact of ASC 842 on Checkersrallys's financial reporting can provide insights into the company's lease obligations and asset values. The change affected how favorable and unfavorable leasehold interests were treated, with such interests for lessee agreements reclassified to "right-of-use assets, net."
Prior to adopting ASC 842, Checkersrallys accounted for refranchising transactions (where they sublease properties to franchisees) on an undiscounted basis under ASC 840. This required recognizing a reserve for exposure under the sublease in the period the sublease was executed. With the adoption of ASC 842, reserves for restaurant retirement costs and sublease subsidies are now captured as an adjustment to the right-of-use assets at the time of transition. This change in accounting standards could impact how Checkersrallys reports its financial performance and position related to lease agreements.