For Degree Wellness, how are right-of-use assets and lease liabilities recorded?
Degree_Wellness Franchise · 2025 FDDAnswer from 2025 FDD Document
s. During the period April 1, 2024 through December 31, 2024, the Company's revenue was comprised entirely of franchise fees recognized "over time".
Leases
The Company recognizes right-of-use assets and lease liabilities for leases with terms greater than 12 months. Leases are classified as either finance or operating leases. This classification dictates whether lease expense is recognized based on an effective interest method (finance leases) or on a straight-line basis over the term of the lease (operating leases). Lease and non-lease components of a contract are accounted for as separate components. The Company's right-of-use assets and lease liabilities relate to office space.
Right-of-use assets and lease liabilities are recorded at the net present value of future lease payments and include any initial direct costs incurred at lease commencement. The incremental borrowing rate is used to determine the net present value of the lease when the rate implicit in the lease is not readily determinable. This represents the rate of interest the Company would have to pay on a collateralized basis to borrow an amount equal to the lease payments under similar terms. Right-of-use assets under finance leases are amortized over the life of the lease or, if shorter, the life of the leased asset, on a straight-line basis. Rightof-use assets under operating leases are reduced as lease expense is incurred.
Source: Item 23 — Receipts (FDD pages 66–257)
What This Means (2025 FDD)
According to Degree Wellness's 2025 Franchise Disclosure Document, the company recognizes right-of-use (ROU) assets and lease liabilities for leases exceeding 12 months. These leases are then classified as either finance or operating leases, which determines how the lease expense is recognized. For leases with terms less than 12 months, the expense is recognized on a straight-line basis over the lease term. The company's ROU assets and lease liabilities primarily relate to office space.
For leases longer than 12 months, Degree Wellness records ROU assets and lease liabilities at the net present value of future lease payments, including any initial direct costs incurred when the lease commences. When the interest rate implicit in the lease is not readily determinable, the company uses its incremental borrowing rate to determine the net present value. This rate represents the interest Degree Wellness would have to pay on a collateralized basis to borrow an equivalent amount under similar terms.
Under finance leases, Degree Wellness amortizes ROU assets over the shorter of the lease term or the asset's useful life, using a straight-line method. For operating leases, the ROU assets are reduced as lease expense is incurred. This accounting treatment is standard and ensures that lease obligations and the corresponding assets are appropriately reflected on Degree Wellness's balance sheet, providing a clear picture of the company's financial commitments related to leased properties.