What accounting standard has Face Foundrie adopted regarding leases?
Face_Foundrie Franchise · 2025 FDDAnswer from 2025 FDD Document
ngly, there would be no effect on the Company's financial statements.
The Company's income tax returns are subject to examination by taxing authorities for a period of three years from the date they are filed. As of December 31, 2024, the 2023, 2022 and 2021 tax years were subject to examination.
(o) Leases
The Company has adopted ASC 842, Leases, which requires lessees to recognize the assets and liabilities that arise from operating and finance leases on the balance sheets, with a few exceptions. The Company has a shared operating lease agreement with multiple related parties to warehouse and office space from the related parties common owner. The Company has reflected one third of the full lease arrangement in its financial statements to reflect the Company's share of the obligation. Were other related parties unable to meet their obligations, it is likely the Company would bear responsibility for the larger lease obligation.
For lease agreements entered into subsequent to the adoption of ASC 842, the Company determines if an arrangement is a lease at inception. The Company's lease liabilities represent the obligation to make lease payments arising from the leases and right of use ("ROU") assets are recognized as an offset at lease inception. ROU assets and lease liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. As the Company's leases typically do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. If the Company's leases include options to extend the lease, the renewal options are not included in the minimum lease terms unless they are reasonably certain to be exercised. Rent expense for lease payments related to operating leases is recognized on a straight-line basis over the lease term and is included in general and administrative expenses in the statements of operations.
The Company has made an accounting policy election not to recognize right-of-use assets and lease liabilities that arise from any short-term leases. All leases with a term of 12 months or less at commencement, for which the Company is not reasonably certain to exercise available renewal options or to enter into new leases that would extend the lease term past 12 months, will be recognized on a straight-line basis over the lease term.
(p) Advertising Costs
The Company expenses advertising costs as incurred. For the years ended December 31, 2024, 2023, and 2022, advertising expenses were $919,283, $218,637, and $312,897, respectively.
NOTES TO THE FINANCIAL STATEMENTS December 31, 2024, 2023 and 2022
(q) Financial Instruments
For certain of the Company's financial instruments, including cash and cash equivalents, accounts receivable, prepaid expenses, and accounts payable the carrying amounts approximate fair value due to their short maturities. The amounts shown for notes payable also approximate fair value because current interest rates and terms offered to the Company for similar debt are substantially the same.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 73)
What This Means (2025 FDD)
According to Face Foundrie's 2025 Franchise Disclosure Document, the company has adopted ASC 842, Leases, which requires lessees to recognize assets and liabilities arising from operating and finance leases on their balance sheets, with some exceptions. Face Foundrie determines if an arrangement is a lease at inception for lease agreements entered into after adopting ASC 842.
For franchisees, this means that if they enter into a lease agreement for their Face Foundrie location, they will need to recognize a right-of-use (ROU) asset and a lease liability on their balance sheet. The ROU asset and lease liability are calculated based on the present value of lease payments over the lease term. Since Face Foundrie's leases typically do not provide an implicit rate, the company uses its incremental borrowing rate to determine the present value of lease payments.
However, Face Foundrie has made an accounting policy election not to recognize ROU assets and lease liabilities for short-term leases, which are leases with a term of 12 months or less at commencement, provided that Face Foundrie is not reasonably certain to exercise available renewal options or enter into new leases that would extend the lease term past 12 months. In these cases, rent expense is recognized on a straight-line basis over the lease term. This could simplify the accounting for franchisees who have short-term leases.
Face Foundrie also has a lease for office space that is classified as an operating lease. The company entered into the lease agreement on January 1, 2022, for a term of ten years without options to renew. The base monthly rent payments are $4,629 for the first year and escalate 2% each year. Face Foundrie used an average loan interest rate of 7% as the incremental borrowing rate to calculate the present value of the lease liability and right-of-use asset. This lease ends in December 2031. The company shares the leased office space with two related parties, and the total monthly lease payment that the three entities split in 2022 was $13,888, escalating 2% each year thereafter. The rent is split into thirds, with each entity paying their own share.