Under what conditions does the Aplus Partnership capitalize the costs to fulfill a contract?
Aplus Franchise · 2024 FDDAnswer from 2024 FDD Document
a symbolic license for which recognition of revenue over time is the most appropriate measure of progress toward complete satisfaction of the performance obligation. Revenue from this symbolic license is recognized evenly over the life of the franchise agreement.
Costs to Obtain or Fulfill a Contract
The Partnership recognizes an asset from the costs incurred to obtain a contract (e.g. sales commissions) only if it expects to recover those costs. On the other hand, the costs to fulfill a contract are capitalized if the costs are specifically identifiable to a contract, would result in enhancing resources that will be used in satisfying performance obligations in the future, and are expected to be recovered. These capitalized costs are recorded as a part of other current assets and other non-current assets on our consolidated balance sheets and are amortized as a reduction of revenue on a systematic basis consistent with the pattern of transfer of the goods or services to which such costs relate.
Source: Item 22 — CONTRACTS (FDD page 68)
What This Means (2024 FDD)
According to Aplus's 2024 Franchise Disclosure Document, the Aplus Partnership recognizes an asset from the costs incurred to obtain a contract only if it expects to recover those costs. However, the costs to fulfill a contract are capitalized under specific conditions. These conditions are that the costs are specifically identifiable to a contract, would result in enhancing resources that will be used in satisfying performance obligations in the future, and are expected to be recovered.
These capitalized costs are then recorded as part of other current assets and other non-current assets on Aplus's consolidated balance sheets. Subsequently, these costs are amortized as a reduction of revenue on a systematic basis. This amortization is done in a manner consistent with the pattern of transfer of the goods or services to which such costs relate.
For the years ended December 31, 2023, 2022, and 2021, the amount of amortization on these capitalized costs that Aplus recognized was $29 million, $22 million, and $21 million, respectively. Aplus also has a policy of expensing the costs to obtain a contract as they are incurred if the expected amortization period is one year or less. This accounting treatment can significantly impact Aplus's reported financial performance, particularly regarding profitability and asset valuation.