How does Craters & Freighters initially and subsequently recognize the lease liability?
Craters_Freighters Franchise · 2025 FDDAnswer from 2025 FDD Document
ives received, and initial direct costs incurred.
The lease liability is initially and subsequently recognized based on the present value of its future lease payments. Variable payments are included in the future lease payments when those variable payments depend on an index or a rate. Increases (decreases) to variable lease payments due to subsequent changes in an index or rate are recorded as variable lease expense (income) in the future period in which they are incurred.
The Company has elected to use a risk-free rate for a term similar to the underlying lease as the discount rate if the implicit rate in the lease contract is not readily determinable.
The ROU asset for operating leases is subsequently measured throughout the lease term at the amount of the remeasured lease liability (i.e., present value of the remaining lease payments), plus unamortized initial direct costs, plus (minus) any prepaid (accrued) lease payments, less the unamortized balance of lease incentives received, and any impairment recognized. The ROU asset for finance leases is amortized on a straight-line basis over the lease term. For operating leases with lease payments that fluctuate over the lease term, the total lease costs are recognized on a straight-line basis over the lease term.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 49)
What This Means (2025 FDD)
According to Craters & Freighters' 2025 Franchise Disclosure Document, the company's lease liability is initially and subsequently recognized based on the present value of its future lease payments. This means that when Craters & Freighters enters into a lease agreement, it calculates the current value of all future payments required by the lease and records this as a liability on its balance sheet. This liability is then adjusted over time as payments are made and as other factors, such as changes in interest rates, affect the present value of the remaining lease payments. Variable payments are included in the future lease payments when those variable payments depend on an index or a rate.
For variable lease payments that depend on an index or rate, Craters & Freighters includes these in the calculation of future lease payments. If there are subsequent changes in the index or rate, the resulting increases or decreases to the variable lease payments are recorded as variable lease expense or income in the period they are incurred. This ensures that the financial statements reflect the most up-to-date assessment of Craters & Freighters' lease obligations.
If the implicit rate in the lease contract is not readily determinable, Craters & Freighters elects to use a risk-free rate for a term similar to the underlying lease as the discount rate. This approach provides a standardized method for determining the present value of lease payments when the actual interest rate embedded in the lease is not clear. This risk-free rate helps Craters & Freighters to accurately reflect the economic reality of its lease obligations in its financial statements.
Craters & Freighters has elected to not recognize ROU assets and lease liabilities for short-term leases that have a lease term of 12 months or less at lease commencement and do not include an option to purchase the underlying asset that the Company is reasonably certain to exercise. Leases containing termination clauses in which either party may terminate the lease without cause and the notice period is less than 12 months are deemed short-term leases with lease costs included in short-term lease expense. The Company recognizes short-term lease cost on a straight-line basis over the lease term.