What method did Stretch Zone use when adopting the new lease accounting standard?
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.
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 the new lease accounting standard using the Effective Date Method. This method involved recognizing and measuring lease assets and liabilities existing at January 1, 2022, which was the beginning of the adoption period. Stretch Zone also utilized certain practical expedients available under this method.
When calculating the lease liabilities at the time of adoption, Stretch Zone used historical experience to determine the noncancellable portion of the lease term. Additionally, the company elected to use the risk-free rate as the discount rate for these calculations. This approach is designed to increase transparency and comparability among organizations by ensuring that right-of-use (ROU) assets and lease liabilities are recognized on the balance sheet.
For a prospective Stretch Zone franchisee, understanding this accounting standard is crucial because it affects how leases for studio locations are reported on the company's financial statements. The adoption of ASC No. 842 requires Stretch Zone to record operating leases as ROU assets and operating lease liabilities, which are based on the present value of future minimum lease payments. This can impact the perceived financial health of the franchise and should be considered when evaluating the investment.