What is the impact of the franchise agreement term on the recognition of unearned revenue for a Bombs Away franchise?
Bombs_Away Franchise · 2024 FDDAnswer from 2024 FDD Document
ance. The Company has elected to adopt this new standard.
Unearned Revenue
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.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 35)
What This Means (2024 FDD)
According to Bombs Away's 2024 Franchise Disclosure Document, the franchise agreement's term directly affects how unearned revenue is recognized. The document states that the company's primary performance obligation involves granting rights to access their intellectual property, along with pre-opening activities like initial training. These activities are considered a single performance obligation.
The portion of the initial franchise fee that is allocated to pre-opening activities that are not brand specific is recognized as revenue ratably as those services are rendered. However, the remaining portion of the franchisee fee, which is not allocated to these specific pre-opening activities, is recorded as unearned revenue.
This unearned revenue is then recognized over the entire term of the franchise agreement. Therefore, a longer franchise term means that the unearned revenue will be recognized gradually over a more extended period, while a shorter term would result in a faster recognition of this revenue. This accounting practice ensures that Bombs Away recognizes revenue in alignment with the services and rights provided to the franchisee throughout the duration of the agreement.