How does Bombs Away account for pre-opening activities that are highly interrelated to the access of the company's intellectual property?
Bombs_Away Franchise · 2024 FDDAnswer from 2024 FDD Document
The Company's primarily performance obligation under the franchise agreement mainly includes granting certain rights to access the Company's intellectual property and a variety of activities relating to opening a franchise unit, including initial training and other such activities commonly referred to collectively as "pre-opening activities", which are recognized as a single performance obligation. The Company expects that certain pre-opening activities provided to the franchisee will not be brand specific and will provide the franchisee with relevant general business information that is separate and distinct from the operation of a company-branded franchise unit. The portion of pre-opening activities that will be provided that is not brand specific is expected to be distinct as it will provide a benefit to the franchisee and is expected not to be highly interrelated or interdependent to the access of the Company's intellectual property, and therefore will be accounted for as a separate distinct performance obligation. All other pre-opening activities are expected to be highly interrelated and interdependent to the access of the Company's intellectual property and therefore will be accounted for as a single performance obligation, which is satisfied by granting certain rights to access the Company's intellectual property over the term of each franchise agreement.
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.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 35)
What This Means (2024 FDD)
According to Bombs Away's 2024 Franchise Disclosure Document, the company addresses pre-opening activities that are highly interrelated and interdependent to the access of its intellectual property as a single performance obligation. This means that Bombs Away recognizes these activities as being fulfilled when it grants the franchisee certain rights to access the company's intellectual property over the term of the franchise agreement.
Bombs Away distinguishes between pre-opening activities that are brand-specific and those that are not. The activities that are not brand specific provide franchisees with general business information separate from the Bombs Away franchise operation. These activities are considered distinct and not highly interrelated with access to Bombs Away's intellectual property. Therefore, they are accounted for as a separate performance obligation and are recognized as the services are rendered.
In practice, this means that Bombs Away allocates the initial franchise fees and any fixed consideration under the franchise agreement first to the standalone selling price of training services that are not brand specific. Any remaining amount is then allocated to the right to access the company's intellectual property. This approach affects how Bombs Away recognizes revenue, aligning it with the delivery of services and access to intellectual property over the franchise term.