Under what conditions does Craters & Freighters consider a contract to be or contain a lease?
Craters_Freighters Franchise · 2025 FDDAnswer from 2025 FDD Document
The Company is a lessee in a noncancelable operating lease. If the contract provides the Company the right to substantially all the economic benefits and the right to direct the use of the identified asset, it is considered to be or contain a lease. Right-of-use (ROU) assets and lease liabilities are recognized at the lease commencement date based on the present value of the future lease payments over the expected lease term. The ROU asset is also adjusted for any lease prepayments made, lease incentives 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's 2025 Franchise Disclosure Document, a contract is considered to be or contain a lease if it provides the company with the right to substantially all the economic benefits and the right to direct the use of the identified asset. This definition is important for Craters & Freighters because it determines how the company recognizes and accounts for leases in its financial statements.
Specifically, Craters & Freighters recognizes right-of-use (ROU) assets and lease liabilities at the lease commencement date. These are based on the present value of future lease payments over the expected lease term. The ROU asset is adjusted for any lease prepayments, lease incentives received, and initial direct costs incurred. The lease liability is based on the present value of its future lease payments, including variable payments that depend on an index or rate.
Craters & Freighters uses 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, plus unamortized initial direct costs, plus or minus any prepaid or 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, the total lease costs are recognized on a straight-line basis over the lease term.