How does Exit account for operating leases in its Balance Sheets?
Exit Franchise · 2025 FDDAnswer from 2025 FDD Document
ASC 842 requires a lessee to recognize a liability to make lease payments and an asset with respect to its right to use the underlying asset for the lease term.
Leases are to be classified as either financing or operating, with classification affecting the pattern of expense recognition in the Statements of Income (Loss).
ASU 2016-02 defines a lease as a contract, or part of a contract, that conveys the right to control the use of identified property, plant, or equipment for a period of time in exchange for consideration. To determine whether a contract conveys the right to control the use of the identified asset for a period of time, the customer has to have both (1) the right to obtain substantially all of the economic benefits from the use of the identified asset and (2) the right to direct the use of the identified asset, a contract does not contain an identified asset if the supplier has a substantive right to substitute such asset ("the leasing criteria"). Management only reassesses its determination if the terms and conditions of the contract are changed.
Management determines if an arrangement is a lease at inception. Operating leases are included in Right-of-Use (ROU) assets, and lease liability obligations are included in the Balance Sheets, except for those that qualify for the short-term scope exception of twelve months or less. ROU assets represent the right to use an underlying asset for the lease term and lease liability obligations represent the obligation to make lease payments arising from the lease. ROU assets and related liabilities are recognized at commencement date based on the present value of lease payments over the lease term.
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, the company adheres to ASC 842, which requires lessees to recognize a lease liability for making lease payments and a corresponding asset that reflects the right to use the underlying asset for the lease term. Exit classifies leases as either financing or operating, which affects how expenses are recognized on their income statements.
Exit includes operating leases within Right-of-Use (ROU) assets and the associated lease liability obligations on its balance sheets. This excludes leases that qualify for the short-term scope exception, which applies to leases of twelve months or less. The ROU assets represent the right to use an asset for the lease term, while the lease liability obligations represent the commitment to make payments as specified in the lease. Both ROU assets and lease liabilities are recorded at the commencement date, based on the present value of the lease payments over the lease term.
Furthermore, Exit has a lease agreement that includes both lease and non-lease components, which they account for as a single lease component. Since most of Exit's leases do not provide an implicit rate, the company estimates the incremental borrowing rate, using available information at the commencement date, to determine the present value of lease payments. The ROU asset also includes any lease payments made, while excluding lease incentives and lease direct costs. Lease expenses for these payments are recognized on a straight-line basis over the lease term. The terms of Exit's leases may also include options to extend or terminate the lease, which are considered when it is reasonably certain that the company will exercise these options.