What accounting standard did Stretch Zone adopt to increase transparency and comparability among organizations regarding leases?
Stretch_Zone Franchise · 2025 FDDAnswer from 2025 FDD Document
In February 2016, the Financial Accounting Standards Board ("FASB") issued guidance (Accounting Standards Codification ("ASC") No. 842, Leases) to increase transparency and comparability among organizations by requiring the recognition of right-of-use ("ROU") assets and lease liabilities on the balance sheet. Most prominent among the changes in the standard is the recognition of ROU assets and lease liabilities by lessees for those leases classified as operating leases. Under the standard, disclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. The Company adopted the standard using the Effective Date Method. Under this method, the Company recognized and measured lease assets and liabilities existing at January 1, 2022 (the beginning of the period of adoption), with certain practical expedients available.
In calculating the related lease liabilities at the time of adoption, the Company utilized historical experience when determining the noncancellable portion of the lease term and elected to use the risk-free rate as the discount rate.
The Company determines if an arrangement is a lease at inception.
Operating leases are recorded as operating lease ROU assets and operating lease liabilities (current portion and long-term portion) on the accompanying balance sheet. Operating lease ROU assets and the related lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. The operating lease ROU assets also include lease incentives and initial direct costs incurred. For operating leases, interest on the lease liability and the amortization of ROU assets result in straight-line rent expense over the lease term.
Leases may include options to extend or terminate the lease which are included in the ROU operating lease assets and operating lease liability when they are reasonably certain of exercise. Operating lease expense associated with minimum lease payments is recognized on a straight-line basis over the lease term. When additional payments are based on usage or vary based on other factors, they are considered variable lease payments and are excluded from the measurement of the ROU asset and lease liability. These payments are recognized as an expense in the period in which the related obligation was incurred.
Source: Item 3 — Franchisee/Debtor's Warranties. (FDD pages 263–364)
What This Means (2025 FDD)
According to Stretch Zone's 2025 Franchise Disclosure Document, the company adopted Accounting Standards Codification (ASC) No. 842, issued by the Financial Accounting Standards Board (FASB), to enhance transparency and comparability concerning leases. This standard mandates the recognition of right-of-use (ROU) assets and lease liabilities on the balance sheet, particularly for leases classified as operating leases. Stretch Zone implemented this standard using the Effective Date Method, which involved recognizing and measuring lease assets and liabilities as of January 1, 2022.
For a prospective Stretch Zone franchisee, this means that lease obligations for their studio location will be clearly reflected on the company's balance sheet. This provides a more accurate picture of the company's financial commitments related to leases. The standard also requires disclosures that enable users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases, offering greater insight into Stretch Zone's lease-related financial obligations.
When calculating lease liabilities at the time of adoption, Stretch Zone utilized historical experience to determine the noncancellable portion of the lease term and chose to use the risk-free rate as the discount rate. Furthermore, Stretch Zone determines if an arrangement is a lease at its inception. Operating leases are recorded as operating lease ROU assets and operating lease liabilities, with the assets including lease incentives and initial direct costs. Interest on the lease liability and the amortization of ROU assets result in straight-line rent expense over the lease term.
Options to extend or terminate leases are included in the ROU operating lease assets and operating lease liability when they are reasonably certain of exercise. Operating lease expense associated with minimum lease payments is recognized on a straight-line basis over the lease term. Variable lease payments, based on usage or other factors, are excluded from the measurement of the ROU asset and lease liability and are recognized as an expense in the period incurred. This comprehensive accounting approach ensures that Stretch Zone's financial statements provide a clear and transparent view of its lease obligations, which is crucial for potential franchisees assessing the company's financial health.