What practical expedients did Checkersrallys elect to adopt when accounting for existing capital and operating leases under the new guidance?
Checkersrallys Franchise · 2025 FDDAnswer from 2025 FDD Document
The Company adopted this new standard on January 4, 2022 and elected to apply the provisions of this standard to the beginning of the period of adoption, with certain practical expedients available. The Company elected to adopt the package of practical expedients to account for existing capital leases and operating leases as finance leases and operating leases, respectively, under the new guidance, without reassessing (a) whether the contracts contain leases under 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.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 91)
What This Means (2025 FDD)
According to Checkersrallys's 2025 Franchise Disclosure Document, when adopting the new lease accounting standard, the company elected to apply certain practical expedients. Checkersrallys chose to adopt the package of practical expedients to account for existing capital leases and operating leases as finance leases and operating leases, respectively. This was done under the new guidance without reassessing whether the contracts contain leases, whether the classification of capital or operating leases would differ, or whether unamortized initial direct costs would have met the definition of initial direct costs at lease commencement.
Additionally, Checkersrallys elected to use hindsight in determining the lease term and in assessing impairment of the company's right-of-use assets. As both a lessee and lessor, Checkersrallys chose not to separate lease and non-lease components, such as common area maintenance fees, by class of underlying asset, applying this expedient to all relevant classes.
Checkersrallys also elected the risk-free rate policy, using the rate implicit in the lease or the yield on United States treasury bonds for the related term to discount lease payments based on information available at lease commencement. The company records related right-of-use assets and liabilities at the present value of lease payments. As of January 1, 2024 and January 2, 2023, Checkersrallys reported that it did not have any operating or finance leases for which it was obligated that had not yet commenced.