How does Closet Storage Concepts classify its leases under ASC 842?
Closet_Storage_Concepts Franchise · 2025 FDDAnswer from 2025 FDD Document
6 $
| 2023 | $ 52,064 |
|---|---|
| 2024 | 42,686 |
| 2025 | 22,098 |
| 2026 | 18,741 |
| 2027 | 19,798 |
| Thereafter | 11,943 $ 167,330 |
NOTE 8 LEASES
Leases are classified as either finance leases or operating leases based on criteria in ASC 842. The Company has operating leases for its corporate offices, warehouse space and retail showroom. The Company has finance leases for equipment and vehicles. Such leases generally have original lease terms between two and six years, and often include options to renew. The Company includes options to extend the lease term if the options are reasonably exercised. The Company currently considers its renewal options to be reasonably certain to be exercised. The Company does not have residual value guarantees or material restrictive covenants associated with its leases.
On January 1, 2022, the Company adopted ASU 2016‐02 using the modified retrospective approach, which permits application of this new guidance at the beginning of the period of adoption, requiring single year presentation.
Operating lease assets represent the right to use an underlying asset, and operating lease liabilities represent the obligation to make lease payments arising from the lease. Operating lease right‐of‐use assets and operating lease liabilities are recognized based on the present value of future of minimum lease payments at lease commencement. The Company calculates the present value of its operating leases using an estimated incremental borrowing rate, which requires judgement. The Company estimates the incremental borrowing rate for each operating lease based on prevailing market rates for collateralized debt in a similar economic environment with similar payment terms and maturity dates commensurate with the terms of the lease.
Certain leases contain variable payments, which are expensed as incurred and not included in the Company's operating lease right‐of‐use assets and operating lease liabilities. These amounts primarily include payments for maintenance, utilities, taxes and insurance on the Company's corporate and retail facilities and are excluded from the present value of the Company's lease obligations.
Previously designated capital leases under ASC 840 are now considered finance leases under ASC 842. The Company calculates the present value of the finance leases using the interest rate implicit in the lease agreement.
Under adoption of ASI 2016‐02, the Company recognized operating lease right‐of‐use assets of $151,374 and an operating
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 59)
What This Means (2025 FDD)
According to Closet Storage Concepts' 2025 Franchise Disclosure Document, the company classifies leases as either finance or operating leases, based on the criteria outlined in ASC 842. Closet Storage Concepts has operating leases for its corporate offices, warehouse space, and retail showroom, while finance leases are used for equipment and vehicles. These leases typically have original terms between two and six years and often include renewal options, which Closet Storage Concepts considers reasonably certain to be exercised. The company does not have residual value guarantees or material restrictive covenants associated with its leases.
Closet Storage Concepts recognizes operating lease assets, representing the right to use an underlying asset, and operating lease liabilities, representing the obligation to make lease payments. These are based on the present value of future minimum lease payments at the commencement of the lease. The present value of operating leases is calculated using an estimated incremental borrowing rate, which requires judgment and is based on prevailing market rates for collateralized debt in a similar economic environment with similar payment terms and maturity dates.
Certain lease payments are considered variable and are expensed as incurred, excluding them from operating lease assets and liabilities. These variable payments primarily cover maintenance, utilities, taxes, and insurance for Closet Storage Concepts' corporate and retail facilities. For finance leases, previously designated as capital leases under ASC 840, the present value is calculated using the interest rate implicit in the lease agreement.
For a potential Closet Storage Concepts franchisee, understanding these classifications is crucial, as it impacts how lease obligations are recorded and managed financially. Franchisees should be aware of the terms of their leases, including renewal options and the potential for variable payments, and how these factors influence their financial statements. Closet Storage Concepts adopted ASU 2016-02 on January 1, 2022, using the modified retrospective approach, which permits application of this new guidance at the beginning of the period of adoption, requiring single year presentation. Under this adoption, the company recognized operating lease right-of-use assets and an operating lease obligation of $151,374. Additionally, Closet Storage Concepts elected not to record operating lease right-of-use assets or operating lease liabilities with an initial term of 12 months or less.