When are variable lease payments recognized in operating expenses for Crepe De Licious?
Crepe_De_Licious Franchise · 2025 FDDAnswer from 2025 FDD Document
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.
Source: Item 23 — RECEIPTS (FDD pages 57–233)
What This Means (2025 FDD)
According to Crepe De Licious's 2025 Franchise Disclosure Document, variable lease payments, which primarily include real estate taxes, utilities, property insurance, and excess mileage fees, are recognized in operating expenses during the period in which the obligation for those payments was incurred. This means that Crepe De Licious accounts for these costs as expenses in the same accounting period that the company becomes liable to pay them, regardless of when the actual payment is made.
For a prospective Crepe De Licious franchisee, this accounting practice means that their operating expenses in a given period will reflect the actual obligations incurred for these variable costs. This can affect the franchisee's profitability calculations and financial reporting. Franchisees should carefully track these variable lease components to accurately manage their operating expenses and ensure proper financial reporting.
Additionally, the FDD states that Crepe De Licious retail space lease agreements may include variable lease payments calculated as eight percent of retail sales over a minimum gross sales amount of $824,000. These payments are made monthly once the minimum sales threshold is reached. These variable lease payments based on sales volume are also treated as operating expenses and are excluded from the measurement of the ROU (Right-of-Use) asset and lease liability. This approach is consistent with accounting standards, ensuring that changes in sales volume directly impact the operating expense rather than being capitalized as part of the lease asset or liability.
Franchisees should be aware of how these variable lease payments are calculated and when they are recognized as expenses, as this can significantly impact their monthly financial statements. Understanding these accounting policies is crucial for effective financial management and accurate assessment of the franchise's profitability.