How does Hydrodog initially and subsequently recognize the lease liability?
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.
The Company has elected to not recognize ROU assets and lease liabilities for short-term leases that have a lease term of 12 months or less at lease commencement and do not include an option to purchase the underlying asset that the Company is reasonably certain to exercise. The Company recognizes lease costs associated with its short-term leases on a straight-line basis over the lease term. When contracts contain lease and non-lease components, the Company accounts for both components as a single lease component.
Source: Item 23 — RECEIPTS (FDD pages 43–166)
What This Means (2025 FDD)
According to Hydrodog's 2025 Franchise Disclosure Document, the company adheres to ASC 842 Leases for recognizing and measuring its leases. At the commencement of each lease, Hydrodog recognizes both a lease liability and a right-of-use (ROU) asset. The lease liability is initially and subsequently recognized based on the present value of the contract's future lease payments. This means that the initial value of the lease liability is determined by calculating the present value of all future lease payments outlined in the contract.
Variable payments are included in the future lease payments if they depend on an index or a rate. The discount rate used for calculating the present value is either the implicit rate within the lease, if readily determinable, or Hydrodog's incremental borrowing rate. The incremental borrowing rate is the interest rate Hydrodog would have to pay to borrow an equivalent amount on a collateralized basis under similar terms and economic conditions. This approach ensures that the lease liability accurately reflects the economic obligations undertaken by Hydrodog.
Hydrodog has elected not to recognize ROU assets and lease liabilities for short-term leases with a term of 12 months or less at lease commencement, provided these leases do not include an option to purchase the underlying asset that Hydrodog is reasonably certain to exercise. For these short-term leases, Hydrodog recognizes lease costs on a straight-line basis over the lease term. When contracts contain both lease and non-lease components, Hydrodog accounts for both components as a single lease component. This simplifies the accounting process for leases that include additional services or elements beyond just the right to use an asset.