How does Stretch Zone record operating leases on the balance sheet?
Stretch_Zone Franchise · 2025 FDDAnswer from 2025 FDD Document
The Company accounts for leases in accordance with the Financial Accounting Standards Board ("FASB"), Accounting Standards Codification ("ASC") No. 842, Leases. Operating leases are recorded as operating lease right-of-use ("ROU") assets and operating lease liabilities (current portion and long-term portion) on the accompanying balance sheets. 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 asset result in straight-line rent expense over the lease term. In calculating the related lease liabilities 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.
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 right-of-use 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 adheres to Accounting Standards Codification (ASC) No. 842, issued by the Financial Accounting Standards Board (FASB), concerning leases. This standard necessitates the recognition of right-of-use (ROU) assets and lease liabilities on the balance sheet for operating leases. Stretch Zone adopted this standard using the Effective Date Method, recognizing and measuring lease assets and liabilities from January 1, 2022. When calculating lease liabilities, Stretch Zone uses historical experience to determine the noncancellable portion of the lease term and opts for the risk-free rate as the discount rate.
Stretch Zone records operating leases as operating lease ROU assets and operating lease liabilities, distinguishing between current and long-term portions, on its balance sheet. These ROU assets and lease liabilities are based on the present value of future minimum lease payments over the lease term at the commencement date. The operating lease ROU assets also incorporate lease incentives and any initial direct costs incurred. The interest on the lease liability and the amortization of ROU assets result in a straight-line rent expense recognized over the lease term.
Leases may include options to extend or terminate, which are factored into the ROU operating lease assets and liabilities if their exercise is reasonably certain. The operating lease expense associated with minimum lease payments is recognized on a straight-line basis throughout the lease term. Additional payments based on usage or other variable factors are treated as variable lease payments and are excluded from the ROU asset and lease liability measurements. Instead, these variable payments are expensed in the period when the obligation is incurred.
For a prospective Stretch Zone franchisee, understanding these accounting practices is crucial, as the lease obligations for their studio space will significantly impact their balance sheet. The franchisee should carefully consider the lease terms, including any extension or termination options, as these will affect the recognized assets and liabilities. Additionally, they should be aware that while minimum lease payments are recognized on a straight-line basis, variable lease payments will be expensed as incurred, which could affect their profitability in different periods.