How does Monicals Pizza recognize assets and liabilities arising from leases on its consolidated balance sheets?

Under the guidance of FASB ASU No. 2016-02, Leases (Topic 842), and all related amendments, 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.

The Company elected not to apply the recognition requirements to all leases with an original term of 12 months or less, for which the Company is not likely to exercise a renewal option or purchase the asset at the end of the lease; rather, short term leases will continue to be recorded on a straight-line basis over the lease term. Further, the Company has elected the policy not to separate lease and nonlease components for all asset classes.

Source: Item 23 — RECEIPTS (FDD pages 46–257)