How does Beauty Bungalows determine when performance obligations are satisfied?
Beauty_Bungalows Franchise · 2025 FDDAnswer from 2025 FDD Document
erated through franchise agreements executed with the Company's franchisees. Each franchise agreement is comprised of several performance obligations.
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.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 47)
What This Means (2025 FDD)
According to Beauty Bungalows' 2025 Franchise Disclosure Document, the company recognizes revenue when it has satisfied a performance obligation by transferring control of the good or service to the franchisee. Beauty Bungalows identifies performance obligations, determines the contract price for each obligation, and allocates the transaction price accordingly.
Specifically, the franchise agreement includes performance obligations distinct from territory and license rights, such as training, opening support, marketing assistance, and franchisee acquisition. The amount allocated to each obligation is based on the expected cost plus a margin. Revenue from 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 from contract execution to the business opening, generally within one year. Unearned initial fee revenues from franchisee acquisition and acceptance are recorded as deferred nonrefundable revenue and recognized over the contract term, currently 10 years from the franchise opening. Similarly, incremental costs of obtaining the franchise agreement are recorded as a franchise acquisition asset and recognized as cost of sales over the same 10-year period.