What is the significance of recognizing right-to-use (ROU) assets and lease liabilities for operating leases on the balance sheet for Pearce Bespoke?
Pearce_Bespoke Franchise · 2025 FDDAnswer from 2025 FDD Document
xpected lease term unless there is a transfer of title or purchase option reasonably certain of exercise.
Note 2 – Summary of Significant Accounting Policies – Continued
Recently Adopted Accounting Standards – In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which supersedes existing guidance for accounting for leases under Topic 840, Leases. The FASB also subsequently issued the following additional ASUs, which amend and clarify Topic 842: ASU 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU 2018-10, Codification Improvements to Topic 842, Leases; ASU 2018-11, Leases (Topic 842): Targeted Improvements; ASU 2018-20, Narrow-scope Improvements for Lessors; and ASU 2019-01, Leases (Topic 842): Codification Improvements. The most significant change in the new leasing guidance is the requirement to recognize right-to-use (ROU) assets and lease liabilities for operating leases on the balance sheet.
During the period ended December 31, 2023, the Company adopted Accounting Standards Update (ASU) No. 2016-02, Leases, which requires lessees to recognize leases on the balance sheet and disclose key information about leasing arrangements. As a result of implementing ASU No. 2016-02, the Company recognized a right-of use asset and lease liability of $47,474 on its balance sheet as of December 31, 2023. The adoption did not result in a significant effect on amounts reported in the statement of operations and members' equity (deficiency) for the period ended December 31, 2023.
New Accounting Standard – In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326). Topic 326 aims to replace the incurred loss impairment methodology under current GAAP with a methodology that reflect expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. Topic 326 was subsequently amended by ASU 2022-02, Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures; ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments – Credit Losses; 2019-10, Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842); and ASU 2019-05, Financial Instruments – Credit Losses (Topic 326): Targeted Transition Relief. The Company was incorporated January 22, 2023, therefore, Topic 326 did not result in any material adjustments to balance sheet accounts, net loss, or retained earnings (deficit).
Note 3 – Franchising
The Company grants franchise licenses to prospective franchisees. The initial term of each license begins on the effective date of the franchise agreement and ends on the tenth anniversary thereof.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 39)
What This Means (2025 FDD)
According to Pearce Bespoke's 2025 Franchise Disclosure Document, the recognition of right-to-use (ROU) assets and lease liabilities for operating leases on the balance sheet is a result of adopting Accounting Standards Update (ASU) No. 2016-02, Leases. This update requires lessees to recognize leases on the balance sheet and disclose key information about leasing arrangements. For Pearce Bespoke, this means they must include the value of assets they have the right to use (like office space) and the corresponding lease obligations as liabilities on their balance sheet. As a result of implementing ASU No. 2016-02, Pearce Bespoke recognized a right-of use asset and lease liability of $47,474 on its balance sheet as of December 31, 2023.
For a potential Pearce Bespoke franchisee, this accounting change primarily affects how the franchisor's financial health is presented. It provides a more complete picture of Pearce Bespoke's financial obligations by including operating leases, which were previously off-balance-sheet items. This change helps investors and franchisees better assess the company's financial leverage and risk. The adoption of this standard did not result in a significant effect on amounts reported in the statement of operations and members' equity (deficiency) for the period ended December 31, 2023.
Specifically, Pearce Bespoke recorded a right to use asset and lease liability for the lease of office space on November 21, 2023. As of January 1, 2024, the remaining initial lease term was 22 months, through October 2025. Lease payments over the term are between $2,000 and $2,150. The right to use asset and lease were recorded as an operating lease. The right to use asset and lease liability were valued using the monthly lease payments over the initial term of the lease using a 4.95% discount rate based on the lessee borrowing rate at the inception of the lease. Total lease expense recorded for the year ended December 31, 2024, was $23,760. The value of the right to user asset was $19,670 as of December 31, 2024, and the value of lease payable was $21, 020 as of December 31, 2024. Future minimum payments of the lease, including unamortized interest for the year ending December 31, 2025 is $21,500.
In Pearce Bespoke's balance sheet as of December 31, 2023, the right-of-use asset was valued at $43,692. The operating lease liability was divided into a current portion of $22,822 and a long-term portion of $21,020, totaling $43,842. This presentation gives a clearer view of Pearce Bespoke's lease obligations and their impact on the company's financial position. For prospective franchisees, understanding these figures is crucial in evaluating the financial stability and long-term commitments of the franchisor.