How does Hardees account for sublease payments received from franchisees in its Combined Consolidated Statements of Income?
Hardees Franchise · 2025 FDDAnswer from 2025 FDD Document
-----| | Assets to be held and used (Level 3) (2) | $ | $ 1,667 |
- (1) Represents the impairment of long-lived assets including property & equipment, net and operating lease assets for multiple domestic company-operated closed restaurants.
- (2) Represents impairment recorded for five domestic company-operated restaurants.
The following table presents long-lived assets measured at fair value on a non-recurring basis during fiscal 2024:
| Assets to be disposed of (Level 2) (1) | $ | 3,311 |
|---|
Source: Item 21 — Financial Statements (FDD pages 84–85)
What This Means (2025 FDD)
According to Hardees' 2025 Franchise Disclosure Document, sublease payments received from franchisees are accounted for as rent revenue within "franchised restaurants and other revenue" in the Combined Consolidated Statements of Income. This accounting treatment applies when Hardees has sold restaurants to franchisees but remains principally liable for the lease obligations and has entered into sublease agreements with these franchisees. Hardees also records the corresponding lease payments as rent expense within "franchised restaurants and other expense" in the same statements. As of January 31, 2025, the nominal value of these lease obligations under the remaining master leases' primary terms was $400,271.
This means that if a prospective Hardees franchisee enters into a sublease agreement with Hardees, the payments they make to Hardees will be recorded as revenue for Hardees. Simultaneously, Hardees' payments on the original lease will be recorded as an expense. This accounting practice provides transparency into the financial impact of these sublease arrangements on Hardees' overall financial statements.
For a potential Hardees franchisee, understanding this accounting treatment is crucial for assessing the financial stability and practices of the franchisor. It also highlights the importance of reviewing the terms of any sublease agreement carefully, particularly the franchisee's obligations and the overall lease structure. Franchisees should also be aware of the total lease obligations Hardees has, as this could impact the franchisor's financial health and, consequently, the support and resources available to franchisees.