How does Exit classify leases for expense recognition in the Statements of Income (Loss)?
Exit Franchise · 2025 FDDAnswer from 2025 FDD Document
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, leases are classified as either financing or operating leases, and this classification impacts how expense is recognized in the Statements of Income (Loss). Exit determines if an arrangement is a lease at the beginning of the lease term. Operating leases are recognized as Right-of-Use (ROU) assets, and the lease obligations are included in the Balance Sheets. However, leases with a term of twelve months or less may qualify for a short-term scope exception.
ROU assets represent the right to use an asset for the lease term, while lease liability obligations represent the obligation to make lease payments. These assets and liabilities are recognized on the commencement date, based on the present value of lease payments over the lease term. If the lease does not provide an implicit rate, Exit estimates the incremental borrowing rate to determine the present value of lease payments. The ROU asset also includes any lease payments made and excludes lease incentives and lease direct costs.
Exit recognizes lease expenses for lease payments on a straight-line basis over the lease term. The company's lease terms may include options to extend or terminate the lease if it is reasonably certain that Exit will exercise the option. This accounting treatment is in accordance with ASC 842, which requires lessees to recognize a liability for lease payments and an asset for the right to use the underlying asset during the lease term.