Is the allocation of initial franchise fees to training services by Bombs Away fixed or variable?
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 Bombs Away's 2024 Franchise Disclosure Document, the allocation of initial franchise fees to training services involves an estimation of the stand-alone selling price of pre-opening activities. This estimation uses an adjusted market assessment approach. Bombs Away allocates the initial franchise fees and any fixed consideration under the franchise agreement to the stand-alone selling price of training services that are not brand specific. Any remaining amount is then allocated to the right to access Bombs Away's intellectual property.
Consideration allocated to pre-opening activities that are not brand specific is recognized ratably as these services are rendered. This means that the revenue is recognized over time as the services are provided to the franchisee. Additionally, 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 that is not allocated to pre-opening activities is recorded as Unearned Revenue. This unearned revenue will be recognized over the term of the franchise agreement. This accounting approach suggests that the allocation is not strictly fixed, as it involves estimating the value of training services and allocating fees accordingly, with any residual allocated to intellectual property rights.