When does Crave Cookies determine the lease classification as operating or finance?
Crave_Cookies Franchise · 2025 FDDAnswer from 2025 FDD Document
lities, end of year | $ 1,279,141 | $ 654,671 |
Note 3. Operating Leases - ASC 842
Accounting Policies
The Company determines if an arrangement is a lease or contains a lease at inception. Leases result in the recognition of ROU assets and lease liabilities on the balance sheets. ROU assets represent the right to use an underlying asset for the lease term, and lease liabilities represent the obligation to make lease payments arising from the lease, measured on a discounted basis. The Company determines lease classification as operating or finance at the lease commencement date.
Crave Cookies Franchising, LLC Notes to Financial Statements December 31, 2023 and 2022
At lease commencement, the lease liability is measured at the present value of the lease payments over the lease term. The ROU asset equals the lease liability adjusted for any initial direct costs, prepaid or deferred rent, and lease incentives. The Company has made a policy election to use a risk-free rate (the rate of a zero-coupon U.S. Treasury instrument) for the initial and subsequent measurement of all lease liabilities. The risk-free rate is determined using a period comparable with the lease term.
The lease term may include options to extend or to terminate the lease that the Company is reasonably certain to exercise. Lease expense is generally recognized on a straight-line basis over the lease term.
The Company has elected not to record leases with an initial term of 12 months or less on the balance sheets.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 47)
What This Means (2025 FDD)
According to Crave Cookies's 2025 Franchise Disclosure Document, the company determines the lease classification as either operating or finance at the lease commencement date. This classification is crucial for how Crave Cookies accounts for the lease on its balance sheets.
Specifically, at the beginning of the lease, Crave Cookies measures the lease liability by calculating the present value of the lease payments that will be made over the lease term. The right-of-use (ROU) asset is then determined by adjusting the lease liability for any initial direct costs, prepaid or deferred rent, and any lease incentives received. Crave Cookies has also elected to use a risk-free rate, based on a zero-coupon U.S. Treasury instrument, to measure all lease liabilities, ensuring consistency and comparability.
For a prospective franchisee, understanding this accounting policy is important because leases are a significant part of operating a physical Crave Cookies location. The classification of the lease impacts the financial statements and how the business's assets and liabilities are presented. Additionally, Crave Cookies does not record leases with an initial term of 12 months or less on their balance sheets, and the expense for these short-term leases is recognized on a straight-line basis over the lease term.