How does Chesters initially measure the lease liability?
Chesters Franchise · 2025 FDDAnswer from 2025 FDD Document
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Leases
In accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification 9ASC) Topic 842, Leases, at lease commencement, the Company initially measures the lease liability at the present value of payments expected to be made during the lease term. The right-of-use lease asset is initially measured as the initial amount of the lease liability, adjusted for lease payments made at or before the lease commencement date, plus certain initial direct costs.
Key estimates and judgments related to leases include how the Company determines: (1) the discount rate used to discount the expected lease payments to present value, (2) lease term, and (3) lease payments. The Company uses the interest rate charged by the lessor as the discount rate. When the interest rate charged by the lessor is not provided, the Company generally uses the risk free interest rate as the discount rate for leases. The lease term includes the noncancellable period of the lease, as well as expected renewal terms. In determining the lease term, management considers all facts and circumstances that create an economic incentive to exercise an extension option, or not exercise a termination option. Extension options are only included in the lease term if the lease is reasonably certain to be extended.
The Company monitors changes in circumstances that would require a remeasurement of its leases
Source: Item 21 — **FINANCIAL STATEMENTS (FDD page 48)
What This Means (2025 FDD)
According to Chesters' 2025 Franchise Disclosure Document, the company initially measures the lease liability at the present value of payments expected to be made during the lease term. This means Chesters calculates the total amount of lease payments a franchisee is expected to make over the life of the lease and then discounts that amount back to its present value. The present value calculation reflects the time value of money, acknowledging that money received today is worth more than the same amount received in the future due to factors like inflation and potential investment earnings.
Chesters determines the right-of-use lease asset by taking the initial amount of the lease liability and adjusting it for any lease payments made at or before the lease commencement date, plus any initial direct costs. This right-of-use asset represents the franchisee's right to use the leased property for the term of the lease.
To determine the present value, Chesters uses the interest rate charged by the lessor as the discount rate. However, if the lessor does not provide the interest rate, Chesters generally uses the risk-free interest rate as the discount rate for leases. The lease term includes the non-cancellable period of the lease, as well as any expected renewal terms. Management considers all facts and circumstances that create an economic incentive to exercise an extension option or not exercise a termination option when determining the lease term, and extension options are only included if the lease is reasonably certain to be extended.
Chesters monitors changes in circumstances that would require a remeasurement of its leases and will remeasure right-of-use lease assets and liabilities if certain changes occur that are expected to significantly affect the amount of any lease liability. This ensures that the lease liability and right-of-use asset accurately reflect the current lease terms and economic conditions.