How does Petro Stopping Center determine its incremental borrowing rate for lease liabilities?
Petro_Stopping_Center Franchise · 2025 FDDAnswer from 2025 FDD Document
A lease liability is recognized on the balance sheet on the lease commencement date at the present value of future lease payments over the lease term. The discount rate applied is the rate implicit in the lease if readily determinable, otherwise an incremental borrowing rate is used. For the majority of the leases in the Company, there is not sufficient information available to readily determine the rate implicit in the lease, and therefore the incremental
borrowing rate is used. The incremental borrowing rate is determined based on factors such as the Company's cost of borrowing, lessee legal entity credit
risk, currency and lease term. The lease term is the non-cancellable period of a lease together with any periods covered by an extension option that the
Company is reasonably certain to exercise, or periods covered by a termination option that the Company is reasonably certain not to exercise. The future lease payments included in the present value calculation are any fixed payments, payments that vary depending on an index or rate, payments due for the reasonably certain exercise of options and expected residual value guarantee payments. Repayments of principal are presented as financing cash flows and payments of interest are presented as operating cash flows.
Source: Item 23 — RECEIPTS **RECEIPTS (FDD pages 87–131)
What This Means (2025 FDD)
According to Petro Stopping Center's 2025 Franchise Disclosure Document, the determination of the incremental borrowing rate for lease liabilities involves several factors. Petro Stopping Center typically uses the rate implicit in the lease if it is readily determinable. However, if this rate cannot be easily determined, Petro Stopping Center resorts to using an incremental borrowing rate.
The incremental borrowing rate is based on several factors including Petro Stopping Center's cost of borrowing, the credit risk of the lessee legal entity, the currency, and the lease term. The lease term includes the non-cancellable period of the lease, any extension options that Petro Stopping Center is reasonably certain to exercise, and any periods covered by termination options that Petro Stopping Center is reasonably certain not to exercise.
Future lease payments included in the present value calculation consist of fixed payments, payments that vary depending on an index or rate, payments due for the reasonably certain exercise of options, and expected residual value guarantee payments. Understanding how Petro Stopping Center calculates this rate is crucial for prospective franchisees as it directly impacts the reported lease liabilities and associated expenses, affecting their financial statements.