How does Closet Storage Concepts recognize operating lease right-of-use assets and liabilities?
Closet_Storage_Concepts Franchise · 2025 FDDAnswer from 2025 FDD Document
tions to be reasonably certain to be exercised. The Company does not have residual value guarantees or material restrictive covenants associated with its leases.
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.
The Company has two operating leases for facilities in New Jersey. The Company leases a showroom in Marlton, New Jersey, with a term through November 2027. The lease calls for monthly payments of $5,141, with annual escalations of 4%. The Company's second facility is located in West Berlin, New Jersey, which houses its corporate headquarters and manufacturing operation. The lease calls for monthly payments of $9,579, with annual escalations of 4%, through April 2027.
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.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 59)
What This Means (2025 FDD)
According to Closet Storage Concepts' 2025 Franchise Disclosure Document, the company recognizes operating lease right-of-use (ROU) assets and operating lease liabilities based on the present value of future minimum lease payments at the commencement of the lease. These assets represent the right to use an underlying asset, while the liabilities represent the obligation to make lease payments arising from the lease. Closet Storage Concepts calculates the present value of its operating leases using an estimated incremental borrowing rate, which requires judgment, and estimates this rate 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 lease payments are considered variable and are expensed as incurred, and are not included in the operating lease ROU assets and liabilities. These variable payments primarily include costs for maintenance, utilities, taxes, and insurance on the company's corporate and retail facilities. These costs are excluded from the present value of Closet Storage Concepts' lease obligations.
In cases where Closet Storage Concepts has leases with an initial term of 12 months or less, the company has elected not to record operating lease ROU assets or operating lease liabilities. This means that short-term leases are treated differently for accounting purposes than longer-term leases. Upon adopting ASU 2016-02, Closet Storage Concepts recognized operating lease right-of-use assets and an operating lease obligation of $151,374 each.