How are operating and finance lease right-of-use assets and liabilities recognized by Crepe De Licious?
Crepe_De_Licious Franchise · 2025 FDDAnswer from 2025 FDD Document
The Company determines if an arrangement is a lease at inception based on the written terms and conditions of the agreement. Right-of-use (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. Operating and finance lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. When known, the Company uses rates implicit in the lease in determining the present value of lease payments. However, most operating leases do not provide an implicit rate. In these situations, the Company has elected to use a risk-free rate based on the information available at the lease commencement date in determining the present value of lease payments. The risk-free rate is determined from rates published by the U.S. Department of the Treasury for time periods consistent with the length of the applicable lease. The Company's lease terms may include options to extend or terminate the lease and these terms are only considered in the calculation of the ROU asset and lease liability when it is reasonably certain that the Company will exercise the particular option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.
The Company has elected to apply the short-term lease exemption to all classes of underlying assets that qualify for the exemption. These leases consist of terms of twelve months or less and do not contain any options to purchase the underlying asset that the lessee is reasonably certain to exercise. In addition, the Company has elected the practical expedient to account for any lease arrangements with parties under common control based on the written terms and conditions of the lease.
For leases that contain both lease and non-lease components, the Company has elected to apply the practical expedient that allows for the components to be combined and accounted for as a single lease component. For arrangements accounted for as a single lease component, there may be variability in future lease payments as the amount of the non-lease components and non-components is typically revised from one period to the next. These variable lease payments, which are primarily comprised of real estate taxes, utilities, property insurance and excess mileage fees are recognized in operating expenses in the period in which the obligation for those payments was incurred.
Source: Item 23 — RECEIPTS (FDD pages 57–233)
What This Means (2025 FDD)
According to Crepe De Licious's 2025 Franchise Disclosure Document, the company determines if an arrangement is a lease at inception based on the written terms and conditions of the agreement. Right-of-use (ROU) assets represent the right to use an underlying asset for the lease term, while lease liabilities represent the obligation to make lease payments arising from the lease. Both operating and finance lease ROU assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term.
When determining the present value of lease payments, Crepe De Licious uses rates implicit in the lease if known. However, since most operating leases do not provide an implicit rate, the company uses a risk-free rate based on information available at the lease commencement date. This risk-free rate is determined from rates published by the U.S. Department of the Treasury for time periods consistent with the length of the applicable lease. The company's lease terms may include options to extend or terminate the lease, but these terms are only considered in the calculation of the ROU asset and lease liability when it is reasonably certain that the company will exercise the particular option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.
Crepe De Licious has elected to apply the short-term lease exemption to all classes of underlying assets that qualify for the exemption. These leases consist of terms of twelve months or less and do not contain any options to purchase the underlying asset that the lessee is reasonably certain to exercise. In addition, the company has elected the practical expedient to account for any lease arrangements with parties under common control based on the written terms and conditions of the lease. For leases that contain both lease and non-lease components, the company has elected to apply the practical expedient that allows for the components to be combined and accounted for as a single lease component. These variable lease payments, which are primarily comprised of real estate taxes, utilities, property insurance and excess mileage fees are recognized in operating expenses in the period in which the obligation for those payments was incurred.
For a potential Crepe De Licious franchisee, this accounting policy means that the initial recognition of a lease will significantly impact the balance sheet by recording both an asset (the right to use the property) and a liability (the obligation to pay). The election of the short-term lease exemption can simplify accounting for leases with a term of 12 months or less. The use of a risk-free rate based on U.S. Treasury rates provides a standardized approach to valuing lease liabilities when an implicit rate is not available, ensuring consistency in financial reporting. Additionally, the policy of recognizing lease expenses on a straight-line basis provides a predictable expense pattern over the lease term, aiding in financial planning and analysis.