How does Christian Brothers Automotive determine whether contracts contain embedded leases?
Christian_Brothers_Automotive Franchise · 2025 FDDAnswer from 2025 FDD Document
on certain other events that require reassessment.
The Company makes significant assumptions and judgments in evaluating its leases. In particular, the Company:
- Evaluates whether a contract contains a lease, by considering factors such as whether the Company obtained substantially all rights to control an identifiable underlying asset and whether the lessor has substantive substitution rights;
- Determines whether contracts contain embedded leases;
Source: Item 23 — RECEIPTS (FDD pages 76–372)
What This Means (2025 FDD)
According to the 2025 Franchise Disclosure Document, Christian Brothers Automotive evaluates whether a contract contains a lease by considering factors such as whether the company obtained substantially all rights to control an identifiable underlying asset and whether the lessor has substantive substitution rights. The company also determines whether contracts contain embedded leases. These evaluations are part of the significant assumptions and judgments Christian Brothers Automotive makes in evaluating its leases.
Christian Brothers Automotive classifies leases as either finance leases or operating leases at the beginning of the lease term. The associated right-of-use asset and lease liability are measured at the net present value of future lease payments. Operating leases are expensed on a straight-line basis over the noncancelable lease term, while finance leases involve amortizing the right-of-use asset and recognizing interest expense using the effective interest method.
To determine the discount rate for measuring right-of-use assets and lease liabilities, Christian Brothers Automotive uses the rate implicit in the lease. If that rate is not readily available, the company uses a risk-free rate based on U.S. Treasury notes or bond rates for a similar term. Right-of-use assets are also assessed for impairment according to the company's long-lived asset policy. Christian Brothers Automotive reassesses lease classification and remeasures right-of-use assets and lease liabilities when a lease is modified and not accounted for as a separate new lease, or upon certain other events requiring reassessment.
Christian Brothers Automotive also evaluates leases with similar commencement dates, lengths of term, renewal options, or other contract terms to determine whether to apply a portfolio approach to such leases. This comprehensive approach ensures that leases are properly accounted for in the company's financial statements.