How were initial franchise fees historically recognized by Body Brain Center?
Body_Brain_Center Franchise · 2025 FDDAnswer from 2025 FDD Document
The Company's revenue comprises of sales from direct center as well as receipts from franchisees.
1) Revenues from franchisees
Revenues from franchisees consist of initial franchise fees, owner training fees, royalties, and advertising fund fees based on a percentage of each franchisee's program sales. Historically, the initial franchise fees are recognized upon opening of a center, which is when the Company has performed substantially all initial services required by the franchise agreement. Under the amendments on the Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606) issued by the Financial Accounting Standard Board (FASB), the franchise right is a distinct performance obligation that transfers over time. Any portion of the initial fee that is allocated to the franchise right should be recognized over the contract term. Accordingly, the initial franchise fees and renewal fee income is recognized over the contract term. Owner training fee revenue is recognized upon the completion of a training program provided by the Company.
Royalties and advertising fund fees are recognized on a monthly basis and are based upon an agreed upon percentage of franchisees' program sales, as defined in the franchise agreement. Advertising fund fees are restricted for the purpose of marketing, sales promotion and promotional materials and are included in the accompanying balance sheets as restricted cash.
Source: Item 23 — RECEIPT (FDD pages 43–178)
What This Means (2025 FDD)
According to Body Brain Center's 2025 Franchise Disclosure Document, the company's revenue from franchisees includes initial franchise fees, owner training fees, royalties, and advertising fund fees, all based on a percentage of each franchisee's program sales. Historically, Body Brain Center recognized initial franchise fees upon the opening of a center. This was based on the understanding that the company had performed substantially all initial services required by the franchise agreement at that point.
However, the document notes that amendments to accounting standards (ASU No. 2014-09), specifically Revenue from Contracts with Customers (Topic 606) issued by the Financial Accounting Standard Board (FASB), have changed this practice. Under the updated standards, the franchise right is now considered a distinct performance obligation that transfers over time.
As a result of these changes, Body Brain Center now recognizes initial franchise fees and renewal fee income over the contract term, rather than recognizing the full amount upfront. Owner training fee revenue is recognized upon the completion of a training program provided by the Company. Royalties and advertising fund fees are recognized on a monthly basis and are based upon an agreed upon percentage of franchisees' program sales, as defined in the franchise agreement. Advertising fund fees are restricted for the purpose of marketing, sales promotion and promotional materials and are included in the accompanying balance sheets as restricted cash.
This change in revenue recognition could impact Body Brain Center's reported financial performance, particularly in the early years of a franchise agreement. Prospective franchisees should be aware of this accounting change and how it might affect the franchisor's financial statements.