How does Potbelly Sandwich Works account for operating leases on their consolidated balance sheet?
Potbelly_Sandwich_Works Franchise · 2025 FDDAnswer from 2025 FDD Document
Our leases typically contain rent escalations over the lease term and lease expense is recognized on a straight-line basis over the lease term. Tenant incentives used to fund leasehold improvements are recognized when earned and reduce right-of-use assets related to the lease. The tenant incentives are amortized through the right-of-use asset as reductions of rent expense over the lease term.
We elected a short-term lease exception policy, permitting us to not apply the recognition requirements of Accounting Standards Codification ("ASC") 842, Leases, to short-term leases (i.e., leases with terms of 12 months or less) and an accounting policy to account for lease and non-lease components as a single component for certain classes of assets.
Rental income for operating leases on properties subleased to franchisees is recorded to franchise royalties, fees and rental income in the consolidated statement of operations. We recognize revenue for fixed sublease payments, net of incentives, on a straight-line basis over the term of the sublease. We recognize revenue for variable sublease payments as the related service has been transferred to the sublessee. Sublease income is recognized to the extent that collectability is probable.
Source: Item 11 — FRANCHISOR'S ASSISTANCE, ADVERTISING, COMPUTER SYSTEMS, AND TRAINING (FDD pages 37–49)
What This Means (2025 FDD)
According to Potbelly Sandwich Works' 2025 Franchise Disclosure Document, the company typically includes rent escalations in their leases, and they recognize lease expenses on a straight-line basis over the lease term. Tenant incentives that are used to fund leasehold improvements are recognized when earned and reduce the right-of-use assets related to the lease. These incentives are then amortized through the right-of-use asset, effectively reducing rent expense over the lease term.
Potbelly Sandwich Works has elected a short-term lease exception policy, which allows them to not apply the recognition requirements of Accounting Standards Codification (ASC) 842, Leases, to leases with terms of 12 months or less. They also have an accounting policy to account for lease and non-lease components as a single component for certain classes of assets.
For properties subleased to franchisees, rental income from operating leases is recorded as franchise royalties, fees, and rental income within the consolidated statement of operations. Potbelly Sandwich Works recognizes revenue for fixed sublease payments, net of any incentives, on a straight-line basis over the term of the sublease. Revenue from variable sublease payments is recognized as the related service is transferred to the sublessee, and sublease income is recognized only to the extent that collectability is probable.
For a potential franchisee, this means that the costs associated with leasing a location will be spread evenly over the lease term for accounting purposes, regardless of actual rent increases. Any incentives received for improving the property will reduce the initial asset value and decrease rent expense over time. Additionally, if a franchisee subleases a property, the income will be recognized consistently over the sublease term, provided that collection of payments is likely.