When is revenue recognized on scan-based trading by Aunt Millies Bakeries?
Aunt_Millies_Bakeries Franchise · 2025 FDDAnswer from 2025 FDD Document
a term shorter than 12-months.
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Revenue Recognition: The Company adopted Accounting Standards Codification Topic 606, Revenues from Contracts with Customers (ASC 606) on October 1, 2020. In accordance with ASC 606, revenue is recognized when control of the promised goods are transferred to customers, in an amount that reflects the transaction price consideration that the Company expects to receive in exchange for those goods.
The Company's industry has used scan-based trading (SBT) technology over several years to share information between the supplier and retailer. An extension of this technology allows the retailer to pay the supplier for product actually purchased by consumers as determined by the retailer's scan system rather than based on the product actually delivered to the retailer. These scan-based trade arrangements result in the Company carrying an inventory at the retailer's location, as well as entering into a shrink share arrangement with the retailer. Control of the inventory does not transfer upon delivery to the retailer because the company controls the risks and rights until the product is scanned at the reseller's register.
Source: Item 23 — RECEIPT (FDD pages 44–196)
What This Means (2025 FDD)
According to Aunt Millies Bakeries's 2025 Franchise Disclosure Document, revenue from scan-based trading (SBT) is recognized when the product is purchased by the consumer. This is because, under SBT arrangements, Aunt Millies Bakeries retains control of the inventory, including the risks and rights, even after the product is delivered to the retailer. Control only transfers when the product is scanned at the reseller's register and purchased by the consumer. This accounting practice aligns with Accounting Standards Codification Topic 606, which dictates that revenue is recognized when control of goods is transferred to customers.
This approach to revenue recognition has significant implications for a prospective Aunt Millies Bakeries franchisee. The franchisee's sales figures and, consequently, their revenue, will directly correlate with consumer purchases rather than deliveries to retail locations. This system incentivizes franchisees to ensure products are appealing and well-stocked to drive consumer sales. It also means that Aunt Millies Bakeries carries the inventory risk until the point of consumer purchase, sharing some of the burden with the retailer through shrink share arrangements.
In fiscal years 2024 and 2023, Aunt Millies Bakeries recorded $265,000,000 and $263,000,000, respectively, in sales through SBT. As of September 30, 2024 and 2023, the company recorded deferred revenue of approximately $2,098,000 and $1,400,000, respectively. This deferred revenue likely represents payments received from independent operators (IOs) for territory rights, which are recognized over the life of the corresponding note receivable from the IO. This indicates a substantial portion of Aunt Millies Bakeries' sales are conducted through SBT, highlighting its importance to the company's overall revenue stream.
For a potential franchisee, understanding the nuances of scan-based trading is crucial. It affects inventory management, sales strategies, and revenue projections. Franchisees should inquire about the specifics of the shrink share arrangement, the technology used for scan-based trading, and how Aunt Millies Bakeries supports franchisees in optimizing sales under this system. Additionally, understanding how deferred revenue from territory sales impacts the overall financial picture can provide a more comprehensive view of the business model.