What is the process Beauty Bungalows uses to identify performance obligations in a franchise agreement?
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.
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 based on Accounting Standards Codification (ASC) 606, "Contracts with Customers." This standard dictates that revenue is recognized when goods or services are transferred to customers, reflecting the expected consideration for those goods or services.
Beauty Bungalows identifies performance obligations within its franchise agreements. These obligations include granting rights to operate in a designated area and the use of proprietary methods, techniques, trade dress, trademarks, and logos, which is considered a license. The company determines the contract price for each performance obligation, allocates the transaction price accordingly, and recognizes revenue when the obligation is satisfied by transferring control of the good or service to the franchisee.
Initial franchise fees are allocated to performance obligations distinct from territory and license rights, such as training, opening support, marketing assistance, and franchisee acquisition and acceptance. The allocation is based on the expected cost plus a margin approach. Revenue from these initial fees is recognized when the performance obligation is fulfilled and control is transferred to the franchisee. Obligations typically satisfied by the opening of the franchised business are considered earned during the period from contract execution to the business opening, generally less than one year. Unearned initial fee revenues from franchisee acquisition and acceptance are recorded as deferred nonrefundable revenue and recognized over the 10-year contract term from the date the franchise opens.
Incremental costs of obtaining a 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. Royalties, based on a fixed percentage of gross sales, are billed monthly and recognized as revenue when earned. For the years ended December 31, 2024 and 2023, there were no royalties earned.