What specific costs are included as incremental costs of obtaining a franchise agreement with a Beauty Bungalows franchisee?

According to Beauty Bungalows' 2025 Franchise Disclosure Document, incremental costs of obtaining a franchise agreement with a franchisee related to unsatisfied performance obligations will be recorded as a franchise acquisition asset. These costs are then recognized as cost of sales over the same term as the related performance obligation, which is currently 10 years.

This means that when Beauty Bungalows incurs costs directly related to securing a new franchisee, such as sales commissions or marketing expenses specifically for franchise recruitment, these costs are not immediately expensed. Instead, they are treated as an asset on the company's balance sheet.

Over the 10-year period, Beauty Bungalows will gradually recognize these initial franchise acquisition costs as an expense, matching them to the revenue generated by that franchisee over the term of their agreement. This accounting approach aims to provide a more accurate picture of the profitability of franchise operations by aligning the costs of acquiring a franchisee with the revenue they generate over time. This is a common practice in the franchise industry.