Under what condition does Exit's management reassess its determination of whether an arrangement is a lease?
Exit Franchise · 2025 FDDAnswer from 2025 FDD Document
ICANT ACCOUNTING POLICIES (continued)**
Leases
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.
Source: Item 23 — RECEIPT (FDD pages 42–235)
What This Means (2025 FDD)
According to Exit's 2025 Franchise Disclosure Document, Exit's management determines if an arrangement is a lease at the beginning of the agreement. Management only reassesses its determination if the terms and conditions of the contract are changed. Leases are classified as either financing or operating, which affects how expenses are recognized. Operating leases are reported as Right-of-Use (ROU) assets and lease liability obligations on the balance sheets, excluding those with a short-term scope exception of twelve months or less. ROU assets represent the right to use an underlying asset for the lease term, while lease liability obligations represent the obligation to make lease payments arising from the lease. ROU assets and related liabilities are recognized at the commencement date based on the present value of lease payments over the lease term.
For a contract to be considered a lease, it must convey the right to control the use of identified property, plant, or equipment for a period in exchange for consideration. The customer must have both the right to obtain substantially all of the economic benefits from the use of the identified asset and 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.
This accounting policy is based on ASC 842, which requires lessees to recognize a liability for lease payments and an asset for the right to use the underlying asset for the lease term. This ensures that Exit's financial statements accurately reflect its lease obligations and assets, providing a clear picture of its financial position to potential franchisees and investors.