How does Flowerama account for its leases?
Flowerama Franchise · 2024 FDDAnswer from 2024 FDD Document
lt of payments to affiliated entities that exceeded the advances from affiliated entities. Fixed dates and terms have not been established for repayment of the amounts due from the affiliated entities. In addition, these advances and repayments do not bear interest.
The Company purchased products and services from affiliates totaling $72,070 and $137,272 during the 52-week period ended July 2, 2023 and 53-week period ended July 3, 2022, respectively. As of July 2, 2023 and July 3, 2022, no material amounts were payable to these affiliates.
The Company has pledged all of its assets as collateral for the credit facility of its Parent corporation. The credit facility terms contain positive and negative covenants with which its Parent was in compliance with as of July 2, 2023.
(8) Leases
The Company currently leases an office and retail store facilities under various leases through fiscal 2027. Lease agreements may contain renewal options and rent escalation clauses and require the Company to pay real estate taxes, insurance, common area maintenance and operating expenses applicable to the leased properties. The Company accounts for its leases in accordance with ASC 842. At contract inception, the Company determines whether a contract is, or contains, a lease by determining whether it conveys the right to control the use of the identified asset for a period of time, by assessing whether the Company has the right to obtain substantially all of the economic benefits from use of the identified asset, and the right to direct the use of the identified asset.
At the lease commencement date, the Company determines if a lease should be classified as an operating or a finance lease (the Company currently has no finance leases) and recognizes a corresponding lease liability and a right-of-use asset on its Balance Sheet. The lease liability is initially and subsequently measured as the present value of the remaining fixed minimum rental payments using discount rates as of the commencement date. Variable payments (including most utilities, real estate taxes, insurance and variable common area maintenance) are expensed as incurred. Further, the Company elected a shortterm lease exception policy, permitting it to not apply the recognition requirements of this standard to short-term leases (i.e., leases with terms of 12 months or less) and an accounting policy to account for leases and nonlease components as a single component for certain classes of assets. The right-of-use asset is initially and subsequently measured at the carrying amount of the lease liability adjusted for any prepaid or accrued lease payments, remaining balance of lease incentives received, unamortized initial direct costs, or impairment charges relating to the right-of-use asset. Right-of-use assets are assessed for impairment using the long-lived assets impairment guidance.
Source: Item 20 — OUTLETS AND FRANCHISEE INFORMATION (FDD pages 72–77)
What This Means (2024 FDD)
According to Flowerama's 2024 Franchise Disclosure Document, the company leases office and retail store facilities under various leases through fiscal year 2027. Flowerama accounts for its leases in accordance with ASC 842. At the beginning of the lease, Flowerama determines if the lease is an operating or finance lease; currently, Flowerama has no finance leases. The company recognizes a lease liability and a right-of-use asset on its balance sheet.
The lease liability is initially and subsequently measured as the present value of the remaining fixed minimum rental payments using discount rates as of the commencement date. Variable payments, such as utilities, real estate taxes, insurance, and common area maintenance, are expensed as they are incurred. Flowerama has elected a short-term lease exception policy, which means they do not apply the recognition requirements to leases with terms of 12 months or less. They also have an accounting policy to account for leases and nonlease components as a single component for certain classes of assets.
The right-of-use asset is initially and subsequently measured at the carrying amount of the lease liability, adjusted for any prepaid or accrued lease payments, remaining balance of lease incentives received, unamortized initial direct costs, or impairment charges relating to the right-of-use asset. These assets are assessed for impairment using long-lived asset impairment guidance. The discount rate used to determine the present value of lease payments is Flowerama's estimated collateralized incremental borrowing rate, based on the yield curve for the respective lease terms, as the company generally cannot determine the interest rate implicit in the lease.
Flowerama recognizes expense for its operating leases on a straight-line basis over the lease term. Renewal option periods are included in the measurement of lease liability, where the exercise is reasonably certain to occur. Key estimates and judgments in accounting for leases include how Flowerama determines lease payments, lease term, and the discount rate used in calculating the lease liability. This means that Flowerama carefully considers these factors to accurately reflect the financial impact of its leases on its financial statements.