What approach does Bombs Away use to estimate the stand-alone selling price of pre-opening activities?
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 company uses an adjusted market assessment approach to estimate the stand-alone selling price of pre-opening activities. Bombs Away first allocates the initial franchise fees and any fixed consideration outlined in 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 as revenue ratably as these services are rendered. For pre-opening activities included under Accounting Standards Update (ASU) to ASC 606, Franchisors—'Revenue from Contracts with Customers (Subtopic 952-606): Practical Expedient', revenue is recognized when the related services have been provided.
The remaining franchisee fee that is not allocated to pre-opening activities is recorded as Unearned Revenue. This revenue will then be recognized over the term of the franchise agreement. This accounting treatment ensures that Bombs Away recognizes revenue in accordance with accounting standards, matching the revenue recognition with the delivery of services and the granting of rights to the franchisee.