What is the effect of adopting ASC 842, Leases, on Face Foundrie's balance sheets?
Face_Foundrie Franchise · 2025 FDDAnswer from 2025 FDD Document
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.
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 impacts how leases are accounted for on the balance sheets. This accounting standard requires Face Foundrie, as a lessee, to recognize assets and liabilities for operating and finance leases on its balance sheets, with some exceptions for short-term leases. This means that instead of simply expensing lease payments, Face Foundrie must now record a 'right-of-use' (ROU) asset and a corresponding lease liability.
For lease agreements entered into after adopting ASC 842, Face Foundrie determines if an arrangement is a lease at the beginning. The company's lease liabilities represent the obligation to make lease payments arising from the leases, and ROU assets are recognized to offset this at the start of the lease. Both ROU assets and lease liabilities are recorded at the commencement date based on the present value of lease payments over the lease term. Since Face Foundrie's leases typically don't provide an implicit rate, the company uses its incremental borrowing rate to determine the present value of lease payments.
However, Face Foundrie has made a policy election not to recognize ROU assets and lease liabilities for short-term leases, defined as those with a term of 12 months or less at commencement, provided that Face Foundrie is not reasonably certain to extend or renew the lease beyond 12 months. These short-term leases are recognized on a straight-line basis over the lease term. Face Foundrie has a shared operating lease agreement with related parties for warehouse and office space, reflecting one-third of the full lease arrangement in its financial statements. If other related parties cannot meet their obligations, Face Foundrie might bear responsibility for the larger lease obligation, which could impact its financial statements.