How will leases be classified under ASU 2016-02 for Gokhale Method franchisees?
Gokhale_Method Franchise · 2024 FDDAnswer from 2024 FDD Document
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842): Amendments to the FASB Accounting Standards Codification ("ASC"), to increase transparency and comparability among organizations by recognizing lease assets and liabilities on the balance sheet and disclosing key information about leasing arrangements. ASU 2016-02 establishes a right-of-use ("ROU") model that requires lessees to record a ROU asset and a lease liability in the statement of financial position for all leases with terms longer than twelve months (the standard may optionally be applied to leases with terms of twelve months or less). Leases will be classified as either finance leases or operating leases depending on the characteristics of the lease. Consistent with current GAAP, the recognition, measurement, and presentation of expenses and cash flows arising from the lease will depend on the lease classification. ASU 2016-02 is effective for fiscal years beginning after December 15, 2021, and early adoption is permitted. The new standard provides optional practical expedients in transition. We will only elect the package of practical expedients where, under the new standard, prior conclusions about lease identification, lease classification and initial direct costs do not need to be reassessed. The new standard also provides practical expedients for ongoing accounting where we elected the practical expedients on adoption and did not record any ROU asset with terms of less than twelve months. The Company has adopted ASC 842 as of the effective date, which is presented in the above financial statements and resulted in the recognition of the right of use asset and lease liability on the balance sheet.
Source: Item 22 — CONTRACTS (FDD page 34)
What This Means (2024 FDD)
According to the 2024 Gokhale Method Franchise Disclosure Document, the Financial Accounting Standards Board (FASB) issued ASU No. 2016-02, Leases (Topic 842), to enhance transparency and comparability among organizations by recognizing lease assets and liabilities on the balance sheet and disclosing key information about leasing arrangements.
For Gokhale Method franchisees, ASU 2016-02 establishes a right-of-use (ROU) model. This model requires franchisees, as lessees, to record a ROU asset and a lease liability on their financial statements for all leases with terms longer than twelve months. The standard can optionally be applied to leases with terms of twelve months or less.
Under ASU 2016-02, leases will be classified as either finance leases or operating leases, depending on the characteristics of the lease. The recognition, measurement, and presentation of expenses and cash flows arising from the lease will depend on this classification, consistent with current Generally Accepted Accounting Principles (GAAP). Gokhale Method states that it will only elect the package of practical expedients where, under the new standard, prior conclusions about lease identification, lease classification and initial direct costs do not need to be reassessed. The new standard also provides practical expedients for ongoing accounting where Gokhale Method elected the practical expedients on adoption and did not record any ROU asset with terms of less than twelve months. The Company has adopted ASC 842 as of the effective date, which is presented in the above financial statements and resulted in the recognition of the right of use asset and lease liability on the balance sheet.