How does Bombs Away account for pre-opening activities that are not brand specific?
Bombs_Away Franchise · 2024 FDDAnswer from 2024 FDD Document
The Company estimates the stand-alone selling price of pre-opening activities using an adjusted market assessment approach. The Company will first allocate the initial franchise fees and the fixed consideration, under the franchise agreement to the standalone selling price of the training services that are not brand specific and the residual, if any, to the right to access the Company's intellectual property. Consideration allocated to pre-opening activities, which are not brand specific are recognized ratably as those services are rendered. Consideration allocated to pre-opening activities included under Accounting Standards Update (ASU) to ASC 606, Franchisors—'Revenue from Contracts with Customers (Subtopic 952-606): Practical Expedient' is recognized when the related services have been rendered.
The remaining franchisee fee not allocated to pre-opening activities are recorded as Unearned Revenue and will be recognized over the term of the franchise agreement.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 35)
What This Means (2024 FDD)
According to the 2024 Bombs Away FDD, the company addresses pre-opening activities that are not brand-specific by estimating the stand-alone selling price using an adjusted market assessment approach. Bombs Away first allocates the initial franchise fees and fixed consideration under the franchise agreement to the standalone selling price of training services that are not brand specific. Any residual amount is then allocated to the right to access Bombs Away's intellectual property.
Consideration allocated to these non-brand-specific pre-opening activities is recognized ratably as the services are rendered. This means that as Bombs Away provides these services, they recognize the revenue associated with them proportionally. The FDD also mentions that these activities are included under Accounting Standards Update (ASU) to ASC 606, Franchisors—'Revenue from Contracts with Customers (Subtopic 952-606): Practical Expedient,' and revenue is recognized when the related services have been rendered.
The remaining franchisee fee that is not allocated to these pre-opening activities is recorded as Unearned Revenue. This unearned revenue will then be recognized over the term of the franchise agreement. This accounting treatment ensures that Bombs Away recognizes revenue appropriately as they fulfill their obligations to the franchisee, distinguishing between services provided upfront and the ongoing value of the franchise agreement.
For a prospective Bombs Away franchisee, this means that a portion of the initial franchise fee covers training and services that are not specific to the Bombs Away brand but are valuable for general business knowledge. The franchisor recognizes this revenue as they provide these services, while the remaining portion of the fee is recognized over the life of the franchise agreement, reflecting the ongoing value and support provided by Bombs Away.