Does Coffee News capitalize equipment with an estimated useful life of less than one year?
Coffee_News Franchise · 2025 FDDAnswer from 2025 FDD Document
ch $0 was outstanding at year end.
The Company had a six-year office lease with an unrelated party for $2,125 per month. Total lease expense for the office was $14,875 in 2022. The lease was terminated in July 2022 and was not renewed.
The Company has elected not to record leases with an initial term of 12 months or less on the statement of financial position. Lease expense on such leases is recognized on a straight-line basis over the lease term. The Company has elected the practical expedient to not separate lease and non-lease components and classifies the contract as a lease if consideration in the contract allocated to the lease component is greater than the consideration allocated to any non-lease
Source: Item 23 — Receipts (FDD pages 36–118)
What This Means (2025 FDD)
Based on the 2025 Coffee News Franchise Disclosure Document, Coffee News has elected not to record leases with an initial term of 12 months or less on the statement of financial position. Instead, the lease expense on such leases is recognized on a straight-line basis over the lease term. This means that if Coffee News leases equipment for less than a year, they expense the cost evenly over the lease term rather than capitalizing it as an asset.
This accounting treatment applies to leases, and the document specifically mentions that Coffee News leases certain equipment on a month-to-month basis. In 2024, equipment lease expense totaled $1,614, $1,749 in 2023, and $1,880 in 2022.
For a prospective Coffee News franchisee, this indicates that short-term equipment leases will be treated as operating expenses rather than capital investments. This can impact the franchisee's financial statements and tax obligations, as expensing leases immediately affects profitability differently than capitalizing and depreciating assets over a longer period. Franchisees should consult with a financial advisor to understand the implications of this accounting policy for their specific situation.