How does Precision Door Service determine if an agreement contains a lease at its inception?
Precision_Door_Service Franchise · 2025 FDDAnswer from 2025 FDD Document
Depreciation expense was $26,846 and $20,219 for the years ended December 31, 2024 and 2023, respectively.
8. Leases
The Company's primary operating lease commitments consist of leases for office and retail space for its company-operated stores and corporate offices. The Company leases vehicles under financing lease agreements expiring at various dates through 2029.
We determine whether an agreement contains a lease at inception based on our right to obtain substantially all of the economic benefits from the use of the identified asset and the right to direct the use of the identified asset. The Company does not to recognize a right-of-use asset and a lease liability for leases with an initial term of twelve months or less. Lease liabilities represent the present value of future lease payments and the right-of-use (ROU) assets represent our right to use the underlying assets for the respective lease terms. The Company does not separate lease and nonlease components for new and modified leases after the adoption date, and instead accounts for each separate lease component of a contract and its associated non-lease components as a single lease component.
Notes to Consolidated Financial Statements ($000's)
The operating lease liability is measured as the present value of the unpaid lease payments and the ROU asset is derived from the calculation of the operating lease liability.
Source: Item 21 — Financial Statements (FDD page 91)
What This Means (2025 FDD)
According to Precision Door Service's 2025 Franchise Disclosure Document, the company determines whether an agreement contains a lease at its inception by assessing two primary factors. These factors are Precision Door Service's right to obtain substantially all of the economic benefits from the use of the identified asset and the right to direct the use of the identified asset. This determination is crucial for the company's financial reporting, as it dictates how the lease is accounted for on their financial statements.
For a prospective franchisee, this information is relevant because it outlines the criteria Precision Door Service uses to classify leases. Understanding these criteria can help a franchisee better comprehend the lease agreements they may enter into, especially concerning real estate or equipment necessary for operating their franchise. It also clarifies how Precision Door Service handles lease components within broader agreements, choosing not to separate lease and non-lease components but rather account for them as a single unit.
Furthermore, Precision Door Service does not recognize a right-of-use asset and a lease liability for leases with an initial term of twelve months or less. This means that short-term leases are treated differently for accounting purposes, which could impact the franchisee's financial obligations and reporting requirements. The lease liabilities are based on the present value of future lease payments, while the right-of-use assets reflect the right to use the underlying assets for the lease terms.
In cases where leases do not provide an implicit rate, Precision Door Service uses its incremental borrowing rate to calculate the present value of lease payments. This rate represents the estimated interest rate required to borrow over a similar term on a collateralized basis in a similar economic environment. This approach ensures a standardized method for valuing lease obligations, which is important for consistent financial reporting and comparison across different lease agreements.