How does Exit account for lease agreements with both lease and non-lease components?
Exit Franchise · 2025 FDDAnswer from 2025 FDD Document
The Company has a lease agreement with lease and non-lease components and accounts for such components as a single lease component. As most of the Company's leases do not provide an implicit rate, the Company estimated the incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The Company uses the implicit rate when readily determinable. The ROU asset also includes any lease payments made and excludes lease incentives and lease direct costs. Lease expense for lease payments is recognized on a straight-line basis over the lease term. The Company's lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise the option.
Source: Item 23 — RECEIPT (FDD pages 42–235)
What This Means (2025 FDD)
According to Exit's 2025 Franchise Disclosure Document, when the company enters into a lease agreement that contains both lease and non-lease components, it accounts for these components as a single lease component. This means that for accounting purposes, Exit does not separate the lease and non-lease elements but treats them as one combined lease.
Since most of Exit's leases do not provide an implicit rate, the company estimates the incremental borrowing rate based on available information at the commencement date to determine the present value of lease payments. However, if the implicit rate is readily determinable, Exit uses that rate instead. The Right-of-Use (ROU) asset includes any lease payments made but excludes lease incentives and direct lease costs. Lease expenses for these payments are recognized on a straight-line basis over the lease term.
Exit's lease terms may also include options to extend or terminate the lease, which the company will exercise when it is reasonably certain that they will do so. This accounting policy provides a simplified approach to handling leases with multiple components, potentially reducing the complexity of financial reporting for Exit.