How does Afuri Ramen Dumpling recognize the initial franchise fee revenue?
Afuri_Ramen_Dumpling Franchise · 2024 FDDAnswer from 2024 FDD Document
Revenue recognition – The Company has analyzed the provisions of the FASB's ASC Topic 606, Revenue from Contracts with Customers, and has concluded that no changes are necessary to conform with the new standard. Franchise fee revenue includes an initial franchise fee, which is generally non-refundable and recognized by the Company as revenue using the straight-line method over the length of the franchise agreement (10 years). The Company allocates a portion of the initial franchise fee to training revenue which is recognized upon the franchise opening for business.
Source: Item 23 — Receipts (FDD pages 50–189)
What This Means (2024 FDD)
According to Afuri Ramen Dumpling's 2024 Franchise Disclosure Document, the company recognizes the initial franchise fee revenue using the straight-line method over the length of the franchise agreement, which is 10 years. The initial franchise fee is generally non-refundable. This means that Afuri Ramen Dumpling does not recognize the entire $45,000 initial franchise fee as revenue immediately upon receipt. Instead, it recognizes a portion of it each month over the 10-year term of the franchise agreement.
In addition, Afuri Ramen Dumpling allocates a portion of the initial franchise fee to training revenue. This portion is recognized as revenue upon the franchise opening for business. This indicates that a part of the initial fee covers the costs associated with training the franchisee and their staff, and Afuri Ramen Dumpling recognizes this revenue when the training is completed and the restaurant is ready to open.
For a prospective franchisee, this accounting practice means that Afuri Ramen Dumpling spreads out the recognition of the initial franchise fee over time, aligning the revenue with the ongoing services and support provided to the franchisee throughout the franchise term. This approach is common in the franchise industry, as it reflects the long-term relationship between the franchisor and franchisee. The initial franchise fee is $45,000.