What discount rate does Hydrodog use for leases if the implicit rate is not readily determinable?
Hydrodog Franchise · 2025 FDDAnswer from 2025 FDD Document
The Company recognizes and measures its leases in accordance with ASC 842 Leases. The Company determines if an arrangement is a lease, or contains a lease, at inception of a contract and when the terms of an existing contract are changed. The Company recognizes a lease liability and a right of use (ROU) asset at the commencement date of each lease. The lease liability is initially and subsequently recognized based on the present value of the contract's future lease payments.
Variable payments are included in the future lease payments when those variable payments depend on an index or a rate. The discount rate is the implicit rate, if it is readily determinable, or the Company's incremental borrowing rate. The Company's incremental borrowing rate for a lease is the rate of interest it would have to pay on a collateralized basis to borrow an amount equal to the lease payments under similar terms and in a similar economic environment.
Source: Item 23 — RECEIPTS (FDD pages 43–166)
What This Means (2025 FDD)
According to Hydrodog's 2025 Franchise Disclosure Document, the company recognizes lease liabilities and right-of-use (ROU) assets at the commencement date of each lease. The lease liability is based on the present value of future lease payments. When determining the discount rate, Hydrodog will use the implicit rate if it is readily determinable. However, if the implicit rate is not readily determinable, Hydrodog will use its incremental borrowing rate.
The incremental borrowing rate is defined as the rate of interest Hydrodog would have to pay on a collateralized basis to borrow an amount equal to the lease payments under similar terms and in a similar economic environment. This means that if a franchisee leases a Hydrodog Vehicle, and the implicit interest rate within the lease agreement isn't clear, Hydrodog will use an interest rate that reflects what it would cost them to borrow the equivalent amount, considering the lease's terms and the prevailing economic conditions.
For a prospective franchisee, this is important because it affects the recognized lease liability and the corresponding ROU asset on Hydrodog's financial statements. Using the incremental borrowing rate when the implicit rate isn't available ensures that the lease is still accounted for accurately, reflecting the true cost of financing the leased asset. This approach is consistent with accounting standards (ASC 842) for leases.