When is revenue from initial fees recognized by Beauty Bungalows?
Beauty_Bungalows Franchise · 2025 FDDAnswer from 2025 FDD Document
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, revenue from initial franchise fees is allocated to performance obligations outlined in the franchise agreement, specifically those distinct from territory and license rights. These obligations include training, opening support, marketing assistance, and franchisee acquisition and acceptance. The amount allocated to each obligation is based on the expected cost plus a margin approach.
Beauty Bungalows recognizes revenue from initial fees when the performance obligation is satisfied, and control of the goods or service has been transferred to the franchisee. For obligations typically completed by the opening of the franchised business, revenue is recognized during the period between contract execution and the business opening, generally within one year.
However, revenue from franchisee acquisition and acceptance is treated differently. This portion of the initial fee is recorded as deferred nonrefundable revenue and is recognized over the term of the franchise agreement, which is currently 10 years from the date the franchise business opens to the public. 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. Revenue from multi-unit development agreements is recognized over the term of the development agreement.