How are variable payments included in future lease payments for Craters & Freighters?
Craters_Freighters Franchise · 2025 FDDAnswer from 2025 FDD Document
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.
For all underlying classes of assets, the Company 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.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 49)
What This Means (2025 FDD)
According to the 2025 FDD, Craters & Freighters includes variable payments in the calculation of future lease payments when these payments are tied to an index or rate. If there are changes to the index or rate that affect the variable lease payments, Craters & Freighters will record these increases or decreases as variable lease expense or income in the period they occur. This approach ensures that the lease liability reflects the most current understanding of future payment obligations based on fluctuating indices or rates.
For a franchisee, this means that if their lease payments are tied to something like the Consumer Price Index (CPI) or a market interest rate, those variable components will be factored into the lease liability from the start. However, any subsequent changes to those indices or rates will be accounted for in the period they happen, rather than retroactively adjusting the entire lease liability. This provides a more dynamic and responsive accounting of lease expenses and income.
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. Furthermore, the company has chosen not to recognize right-of-use (ROU) assets and lease liabilities for short-term leases with a term of 12 months or less, especially if there is no option to purchase the underlying asset. This accounting treatment simplifies the handling of leases, particularly those with variable payment terms, and ensures compliance with accounting standards.