How does Exit estimate the incremental borrowing rate when the lease does not provide an implicit rate?
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 lease agreement with lease and non-lease components does not provide an implicit rate, Exit estimates the incremental borrowing rate. This estimation is based on the information available at the commencement date to determine the present value of lease payments. Exit uses the implicit rate when it is readily determinable.
For a prospective Exit franchisee, this means that if you lease property and the lease doesn't explicitly state the interest rate, Exit has a method to estimate what that rate would be. This is important for accounting purposes, as it affects how the lease is valued on the company's balance sheet.
This approach ensures that Exit can accurately account for its lease obligations even when the lease terms don't provide all the necessary information upfront. It also aligns with standard accounting practices, which require companies to estimate certain financial metrics when explicit data is unavailable.