How is lease expense for lease payments recognized by Exit over the lease term?
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, the company recognizes lease expense for lease payments on a straight-line basis over the lease term. This means that the total lease expense is divided evenly over the entire duration of the lease, resulting in a consistent expense amount being recorded each period.
This accounting method provides a predictable and stable expense for Exit, which can help in financial planning and analysis. It also reflects the economic reality that the benefit derived from the leased asset is typically consistent throughout the lease term. Any options to extend or terminate the lease are considered when determining the lease term if it is reasonably certain that Exit will exercise the option.
For a prospective Exit franchisee, understanding this accounting practice is important for budgeting and forecasting. The franchisee can expect a consistent lease expense each month, which simplifies financial projections. However, it's important to note that the actual cash payments may vary due to factors such as rent escalations or changes in operating expenses and taxes, as seen in the Lakeville, Minnesota office space lease, where monthly rent ranged from $3,754 to $6,760.