How does Beauty Bungalows allocate the transaction price to each performance obligation?
Beauty_Bungalows Franchise · 2025 FDDAnswer from 2025 FDD Document
The Company identifies those performance obligations, determines the contract price for each performance obligation, allocates the transaction price to each performance obligation and recognizes revenue when the Company has satisfied the performance obligation by transferring control of the good or service to the franchisee.
When a franchisee purchases a franchise, the Company grants the franchisee the rights to operate in a designated area and to use the proprietary methods, techniques, trade dress, trademarks, and logos ("the license"). The license is considered to be symbolic intellectual property. Revenues related to the license are continuing royalties based on a fixed percentage of gross sales of each location. These revenues will be used to continue the development of the Company's brand, the franchise system and provide ongoing support for the Company's franchisees over the term of the agreement. The royalties are billed monthly and are recognized as revenue when earned. For the years ended December 31, 2024 and 2023, there were no royalties earned.
Revenue from initial fees is allocated to the performance obligations in the franchise agreement that are distinct from the territory and license rights. These primarily include training services, opening support services, opening marketing assistance and franchisee acquisition and acceptance. The amount allocated to each identified performance obligation is determined using the expected cost plus a margin approach. Revenue from initial fees is recognized when the performance obligation is satisfied, and control of the goods or service has been transferred to the franchisee. Performance obligations that are normally satisfied by the opening of the franchised business to the public are determined to be earned during the period from the execution of the contract to the opening of the franchised business which is generally less than one year. Unearned initial fee revenues from franchisee acquisition and acceptance will be recorded as deferred nonrefundable revenue and recognized as revenue over the term of the contract which is currently 10 years from the date the franchisee opens the franchise business to the public. Incremental costs of obtaining a franchise agreement with a franchisee related to unsatisfied performance obligations will be recorded as a franchise acquisition asset and are recognized as cost of sales over the same term as the related performance obligation which is currently 10 years. Revenue from multi-unit development agreements is recognized over the term of the development agreement
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 47)
What This Means (2025 FDD)
According to Beauty Bungalows' 2025 Franchise Disclosure Document, the company identifies performance obligations within the franchise agreement and determines a contract price for each. Beauty Bungalows allocates the overall transaction price to each specific obligation and recognizes revenue once it has fulfilled the obligation by transferring control of the related goods or services to the franchisee.
For the initial franchise fee, Beauty Bungalows allocates revenue to performance obligations distinct from the territory and license rights. These obligations primarily include training, opening support, marketing assistance, and franchisee acquisition and acceptance. The amount allocated to each of these is determined using the expected cost plus a margin approach. Revenue from these initial fees is recognized when the obligation is satisfied and control of the goods or service has been transferred to the franchisee.
Performance obligations typically satisfied by the opening of the franchised business are considered earned during the period between contract execution and the business opening, generally less than one year. Any unearned initial fee revenues from franchisee acquisition and acceptance are recorded as deferred nonrefundable revenue and recognized over the 10-year term of the franchise agreement, starting from the date the franchise opens to the public. Similarly, incremental costs of obtaining the franchise agreement related to unsatisfied performance obligations are recorded as a franchise acquisition asset and recognized as cost of sales over the same 10-year period. Revenue from multi-unit development agreements is recognized over the term of the development agreement.
For the franchise license, Beauty Bungalows considers this to be symbolic intellectual property. Revenues related to the license are continuing royalties based on a fixed percentage of gross sales of each location. These royalty revenues are used to continue developing the Beauty Bungalows brand and franchise system, as well as to provide ongoing support to franchisees over the term of the agreement. Royalties are billed monthly and recognized as revenue when earned. It is worth noting that for the years ended December 31, 2024 and 2023, there were no royalties earned.