How does Clear Pest Pros determine if a contract contains a lease?
Clear_Pest_Pros Franchise · 2025 FDDAnswer from 2025 FDD Document
The Company assesses at contract inception whether a contract is, or contains, a lease. A contract contains a lease if it conveys the right to control the use of an identified asset for a period of time in exchange for consideration.
The Company has a single recognition and measurement approach for all leases, except for short-term leases. The Company recognizes lease liabilities to make lease payments and right-of-use (ROU) assets at lease inception, as follows:
- ROU Assets The Company recognizes ROU assets at the commencement date of the lease (i.e., the date the underlying asset is available for use). ROU assets are measured at cost, less any accumulated depreciation and impairment losses, and adjusted for any remeasurement of lease liabilities. The cost of ROU assets includes the amount of lease liabilities recognized, initial direct costs incurred, and lease payments made at or before the commencement date less any lease incentives received. ROU assets are depreciated on a straight-line basis over the shorter of the lease term and the estimated useful lives of the assets.
- Lease Liabilities – At the commencement date of the lease, the Company recognizes lease liabilities measured at the present value of lease payments to be made over the lease term. The lease payments include fixed payments (including in-substance fixed payments) less any lease incentives receivable, variable lease payments that depend on an index or a rate, and amounts expected to be paid under residual value guarantees. The lease payments also include the exercise price of a purchase option reasonably certain to be exercised by the Company and payments of penalties for terminating the lease, if the lease term reflects the Company exercising the option to terminate.
Variable lease payments that do not depend on an index or a rate are recognized as expenses in the period in which the event or condition that triggers the payment occurs.
The Company has elected to combine lease and non-lease components. In calculating the present value of lease payments, the Company elected to use the Prime Rate at the lease commencement date for property leases. After the commencement date, the amount of lease liabilities is increased to reflect the accretion of interest and reduced for the lease payments made.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 67)
What This Means (2025 FDD)
According to Clear Pest Pros's 2025 Franchise Disclosure Document, the company determines if a contract contains a lease at the contract's inception. Clear Pest Pros assesses whether the contract conveys the right to control the use of an identified asset for a specific period in exchange for consideration. This determination is crucial for the company's financial reporting and lease management.
Clear Pest Pros uses a consistent recognition and measurement approach for all leases, except for short-term leases. The company recognizes lease liabilities for lease payments and right-of-use (ROU) assets when the lease begins. ROU assets are measured at cost, considering accumulated depreciation, impairment losses, and adjustments for lease liability remeasurements. The cost includes recognized lease liabilities, initial direct costs, and lease payments made before the commencement date, minus any lease incentives received. These assets are depreciated using the straight-line method over the shorter of the lease term or the asset's estimated useful life.
Lease liabilities are measured at the present value of lease payments to be made over the lease term, including fixed payments, variable payments based on an index or rate, and amounts expected to be paid under residual value guarantees. The calculation also includes the exercise price of a purchase option if it is reasonably certain to be exercised and penalties for terminating the lease if the lease term reflects the company exercising the option to terminate. Variable lease payments not based on an index or rate are recognized as expenses when the event triggering the payment occurs. Clear Pest Pros has elected to combine lease and non-lease components and uses the Prime Rate at the lease commencement date for property leases to calculate the present value of lease payments. After the commencement date, lease liabilities are adjusted to reflect interest accretion and lease payments made.