When calculating lease liabilities, what rate does Stretch Zone use as the discount rate?
Stretch_Zone Franchise · 2025 FDDAnswer from 2025 FDD Document
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, when calculating lease liabilities, Stretch Zone utilizes the risk-free rate as the discount rate. This approach is part of their accounting policy in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) No. 842, Leases. This standard requires the recognition of right-of-use (ROU) assets and lease liabilities on the balance sheet.
Specifically, when Stretch Zone initially adopted this standard on January 1, 2022, they used historical experience to determine the noncancellable portion of the lease term and elected to use the risk-free rate as the discount rate. This risk-free rate is applied to the future minimum lease payments over the lease term to determine the present value, which is then used to recognize both the operating lease ROU assets and operating lease liabilities.
For a prospective Stretch Zone franchisee, this means that the initial calculation of lease liabilities will be based on the risk-free rate at the time of adoption. Additionally, any options to extend or terminate the lease are included in these calculations if they are reasonably certain to be exercised. However, variable lease payments, which are based on usage or other factors, are excluded from these measurements and are recognized as an expense in the period they are incurred.