How are the sales-based advertising fees for Bath Tune Up franchisees recognized as revenue?
Bath_Tune_Up Franchise · 2025 FDDAnswer from 2025 FDD Document
ese fees are fixed in nature and do not have pre-determined escalation amounts. In accordance with ASC 606, these fees are recognized over time on a monthly basis as the franchise utilizes the right to access the aforementioned services.
The Company also receives advertising funds from the franchisees to provide national and regional advertisements for the benefit of the franchisees ("NAF"). These advances and deposits are salesbased for each franchisee and are restricted and segregated. The sales-based advertising fee is considered variable consideration and will continue to be recognized as revenue as such sales are earned by the franchisees. Sales-based fees qualify under the royalty constraint exception, and do not require an estimate of future transaction price. The Company presents advertising contributions received from franchisees as franchise advertising fee revenue and records all expenses of the advertising fund within franchise expenses, resulting in an increase in revenues and expenses on the statement of earnings, with no change to the balance sheet unless the advertising was underspent. When underspent (revenue exceeds cash payments for advertising), the advertising fund will accrue the difference from collections received and amount owed. In addition, the franchise agreements allow the Company to reimburse itself for reasonable costs out of the advertising deposits as compensation for its administration over the accounts.
Gross Sales Rebates
The Company receives vendor rebates primarily from KTU products. These rebates are generally covered by binding agreements, which are signed agreements between various vendors and the Company.
Source: Item 21 — FINANCIAL STATEMENTS (FDD pages 51–52)
What This Means (2025 FDD)
According to Bath Tune Up's 2025 Franchise Disclosure Document, the company recognizes sales-based advertising fees, also known as NAF (National Advertising Fund) fees, as revenue in a specific manner. These fees are considered variable consideration and are recognized as revenue in the period when the franchisee generates the sales. This means that the revenue recognition is directly tied to the franchisee's sales performance.
The FDD specifies that these sales-based fees qualify under the royalty constraint exception. This exception means that Bath Tune Up does not need to estimate future transaction prices when recognizing the advertising fees as revenue. This simplifies the accounting process, as the revenue recognized is based on actual sales data rather than projections.
For Bath Tune Up, the advertising contributions received from franchisees are recorded as franchise advertising fee revenue. The company records all expenses related to the advertising fund within franchise expenses. This can lead to an increase in both revenues and expenses on the statement of earnings. However, there is no change to the balance sheet unless the advertising fund is underspent, meaning revenue exceeds cash payments for advertising. In such cases, the advertising fund will accrue the difference between collections received and the amount owed. The franchise agreements also allow Bath Tune Up to reimburse itself for reasonable administrative costs from the advertising deposits.