What was the impact on Aw's balance sheet upon adopting ASC-606 and ASU 2021-02?
Aw Franchise · 2025 FDDAnswer from 2025 FDD Document
pass through directly to the members' and is reported on their individual income tax returns.
3. REVENUE RECOGNITION
The Company records revenue in accordance Accounting Standards Board ("FASB") and Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers (Topic 606). The transaction price attributable to performance obligations are recognized as the performance obligations are satisfied. The portion of the franchise fee, if any, that is not attributable to a distinct performance obligation are amortized over the life of the related franchise agreements. The company adopted ASC-606 and ASU 2021-02 using the modified retrospective method starting with January 1, 2020. Upon adoption, the Company recorded deferred revenue, and a cumulative effect to decrease accumulated retained earnings by $58
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 39)
What This Means (2025 FDD)
According to Aw's 2025 Franchise Disclosure Document, the company adopted ASC-606 and ASU 2021-02 using the modified retrospective method starting January 1, 2020. Upon adoption, Aw recorded deferred revenue. This adjustment had a cumulative effect, decreasing accumulated retained earnings by $58,500 on Aw's balance sheet. This adjustment reflects the unamortized portion of fees received on behalf of franchise agreements that were operating at the time of adoption.
In simpler terms, Aw had to adjust its accounting practices to comply with new revenue recognition standards. These standards dictate how and when companies can recognize revenue, especially when dealing with contracts that span multiple periods, like franchise agreements. The deferred revenue represents franchise fees that Aw received upfront but hadn't yet recognized as earned revenue under the previous accounting method.
The decrease in accumulated retained earnings by $58,500 indicates that Aw had previously recognized some revenue prematurely under the old accounting rules. By decreasing retained earnings, Aw is essentially correcting its financial statements to reflect a more accurate picture of its revenue recognition. For a prospective franchisee, this adjustment itself has no direct financial impact. However, it demonstrates that Aw is committed to adhering to current accounting standards, which promotes transparency and reliability in its financial reporting.