How does Potbelly Sandwich Works determine if an arrangement is or contains a lease?
Potbelly_Sandwich_Works Franchise · 2025 FDDAnswer from 2025 FDD Document
se 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.
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's 2025 Franchise Disclosure Document, the company has elected a short-term lease exception policy. This policy allows Potbelly Sandwich Works to not apply the recognition requirements of Accounting Standards Codification (ASC) 842, Leases, to leases with terms of 12 months or less. Additionally, Potbelly Sandwich Works has an accounting policy to account for lease and non-lease components as a single component for certain classes of assets.
For franchisees, this means that Potbelly Sandwich Works simplifies the accounting for short-term leases, treating leases of 12 months or less differently than longer-term leases. This can reduce the complexity of financial reporting for these shorter leases. Additionally, by accounting for lease and non-lease components as a single unit for certain assets, Potbelly Sandwich Works streamlines its accounting processes.
Furthermore, the FDD states that Potbelly Sandwich Works' leases typically include 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. This approach to lease accounting can impact the franchisee's financial statements, particularly in terms of how rent expense and asset values are reported.