Does Cool Binz include the exercise price of a purchase option when calculating lease liabilities?
Cool_Binz Franchise · 2025 FDDAnswer from 2025 FDD Document
- 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 23 — RECEIPTS (FDD pages 63–238)
What This Means (2025 FDD)
According to Cool Binz's 2025 Franchise Disclosure Document, when calculating lease liabilities, Cool Binz includes the exercise price of a purchase option if the company is reasonably certain to exercise that option. This is part of determining the present value of lease payments to be made over the lease term. Lease payments also include fixed payments, variable lease payments dependent on an index or rate, and amounts expected to be paid under residual value guarantees.
For a prospective Cool Binz franchisee, this means that if a lease agreement contains an option to purchase the leased asset at a predetermined price, and it's likely Cool Binz will exercise that option, the anticipated purchase price will be factored into the total lease liability from the start. This can impact the reported liabilities on the franchisee's balance sheet and affect financial ratios used by lenders or investors.
Cool Binz uses the Prime Rate at the lease commencement date for property leases when calculating the present value of lease payments. After the lease starts, the lease liabilities are adjusted to reflect interest and payments made. Variable lease payments not tied to an index or rate are expensed when the event triggering the payment occurs.