How are operating lease right-of-use assets expensed for Monicals Pizza?
Monicals_Pizza Franchise · 2025 FDDAnswer from 2025 FDD Document
Effective January 1, 2022, the Company adopted FASB Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842), and all related amendments using the modified retrospective approach.
The Company recognizes the assets and liabilities that arise from leases on the consolidated balance sheets. Right-of-use assets represent the Company's right to use an underlying asset for the lease term, while lease liabilities represent the Company's obligation to make lease payments arising from the lease. Right-of-use assets and lease liabilities are recognized at the commencement date of a lease based on the net present value of the lease payments over the lease term.
At lease inception, leases are classified as either finance leases or operating leases with the associated right-of-use asset and lease liability measured at the net present value of future lease payments. Operating lease right-of-use assets are expensed on a straight-line basis as lease expense over the non-cancelable lease term. Lease expenses for the Company's finance leases are comprised of the amortization of the right-of-use asset and interest expense recognized based on the effective interest method.
In determining the discount rate used to measure the right-of-use assets and lease liabilities, the Company uses the rate implicit in the lease, or if not readily available, the Company uses a riskfree rate based on U.S. Treasury notes or bond rates for a similar term.
The Company makes significant assumptions and judgments in applying the requirements of Topic 842. In particular:
- The Company evaluates whether a contract contains a lease, by considering factors such as whether the Company obtained substantially all rights to control an identifiable underlying asset and whether the lessor has substantive substitution rights;
- Determining whether contracts contain embedded leases; and
- Determining for leases that contain a residual value guarantee, whether a payment at the end of the lease term was probable and, accordingly, whether to consider the amount of a residual value guarantee in future lease payments.
Source: Item 23 — RECEIPTS (FDD pages 46–257)
What This Means (2025 FDD)
According to the 2025 FDD, Monicals Pizza recognizes assets and liabilities arising from leases on its consolidated balance sheets. Right-of-use assets represent the company's right to use an underlying asset for the lease term, while lease liabilities represent the obligation to make lease payments. These assets and liabilities are recognized at the commencement of the lease, based on the net present value of lease payments over the lease term.
At the beginning of the lease, Monicals Pizza classifies leases as either finance or operating leases. The right-of-use asset and lease liability are measured at the net present value of future lease payments. For operating leases, the right-of-use assets are expensed on a straight-line basis as lease expense over the non-cancelable lease term. Finance leases involve the amortization of the right-of-use asset and interest expense recognized using the effective interest method.
To determine the discount rate for measuring right-of-use assets and lease liabilities, Monicals Pizza uses the rate implicit in the lease. If that rate is not readily available, the company uses a risk-free rate based on U.S. Treasury notes or bond rates for a similar term. Monicals Pizza also makes assumptions and judgments when applying Topic 842, such as evaluating whether a contract contains a lease, determining if contracts contain embedded leases, and determining whether a payment at the end of the lease term was probable.