How are ROU assets and liabilities recognized by Golden Krust Caribbean Restaurant?
Golden_Krust_Caribbean_Restaurant Franchise · 2024 FDDAnswer from 2024 FDD Document
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued)
Leases:
The Company leases office space and two restaurant locations and determines if an arrangement is a lease at inception. Operating leases are included in ROU operating asset, current lease liability – operating, and long-term liability – operating on the consolidated balance sheet for the year ended December 31, 2022. The Company does not have any finance leases as of December 31, 2022
ROU assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent the Company's obligation to make lease payments arising from the lease. ROU assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. As most of leases do not provide an implicit rate, the Company uses a risk-free rate based on the information available at commencement date in determining the present value of lease payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. The lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Operating lease expense for lease payments is recognized on a straight-line basis over the lease term.
The Company has elected to separate non-lease components from lease components and accounts for each separate lease component separately from the non-lease component.
The Company has elected to recognize payments for short-term leases with a lease term of 12 months or less as expense as incurred and these leases are not included as lease liabilities or right of use assets on the balance sheet.
The Company's lease agreements do not contain any material residual value guarantees or material restrictive covenants.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 35)
What This Means (2024 FDD)
According to Golden Krust Caribbean Restaurant's 2024 Franchise Disclosure Document, the company addresses the accounting of operating leases, which include office space and restaurant locations. The company determines if an arrangement is a lease at its inception. These leases are then recognized on the consolidated balance sheet under "ROU operating asset, current lease liability – operating, and long-term liability – operating" for the year ending December 31, 2022. Golden Krust Caribbean Restaurant does not have any finance leases as of December 31, 2022.
Right-of-use (ROU) assets represent Golden Krust Caribbean Restaurant's right to use an asset for the lease term, while lease liabilities represent the obligation to make lease payments. These ROU assets and liabilities are recognized at the lease commencement date, based on the present value of lease payments over the lease term. Since most leases do not provide an implicit rate, the company uses a risk-free rate to determine the present value of lease payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. Lease terms may include options to extend or terminate the lease if it is reasonably certain that the company will exercise that option. Operating lease expenses are recognized on a straight-line basis over the lease term.
Golden Krust Caribbean Restaurant has elected to separate non-lease components (such as real estate taxes, insurance, utilities, and maintenance costs) from lease components, accounting for each separately. Additionally, the company has elected to recognize payments for short-term leases with a term of 12 months or less as an expense when incurred, and these leases are not included as lease liabilities or right-of-use assets on the balance sheet. The company's lease agreements do not contain any material residual value guarantees or material restrictive covenants.