What is the impact of pre-opening activities being brand-specific on Bombs Away's revenue recognition?
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 brand distinguishes between pre-opening activities that are brand-specific and those that are not when recognizing revenue. The company has adopted Accounting Standards Update (ASU) to ASC 606, Franchisors—'Revenue from Contracts with Customers (Subtopic 952-606): Practical Expedient'.
Bombs Away recognizes revenue differently based on whether the pre-opening activities are brand-specific. For pre-opening activities that are not brand-specific, Bombs Away recognizes the revenue ratably as these services are rendered. This means that the revenue is recognized over the period that the services are provided, rather than all at once.
For all other pre-opening activities that are considered highly interrelated and interdependent to the access of Bombs Away's intellectual property, they are accounted for as a single performance obligation. This performance obligation is satisfied over the term of each franchise agreement by granting certain rights to access the company's intellectual property. The remaining franchisee fee not allocated to pre-opening activities is recorded as Unearned Revenue and will be recognized over the term of the franchise agreement.