How does Cool Binz measure lease liabilities at the commencement date of a lease?
Cool_Binz Franchise · 2025 FDDAnswer from 2025 FDD Document
The Company recognizes lease liabilities to make lease payments and right-of-use (ROU) assets at lease inception, as follows:
- 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, the company recognizes lease liabilities at the commencement date of the lease, measured at the present value of lease payments to be made over the lease term. These lease payments include 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.
For a Cool Binz franchisee, this means that when entering into a lease agreement for property or equipment, the initial lease liability is calculated by discounting all future lease payments back to their present value using an appropriate discount rate. This present value becomes the recorded lease liability on the company's balance sheet at the start of the lease. The company has elected to use the Prime Rate at the lease commencement date for property leases.
It is important to note that variable lease payments not tied to an index or rate are expensed as incurred, rather than included in the initial lease liability. After the commencement date, the lease liability will increase due to the accretion of interest and decrease as lease payments are made. This accounting treatment provides a clear picture of Cool Binz's lease obligations and their impact on the company's financial position.