What is the impact of pre-opening activities not 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 company distinguishes between pre-opening activities that are brand-specific and those that are not. This distinction directly impacts how Bombs Away recognizes revenue from franchise fees. The company uses an adjusted market assessment approach to estimate the stand-alone selling price of pre-opening activities. Initial franchise fees and fixed consideration are allocated to the standalone selling price of training services that are not brand specific. Any residual amount is then allocated to the right to access Bombs Away's intellectual property.
For pre-opening activities that are not brand-specific, Bombs Away recognizes the revenue ratably as these services are rendered to the franchisee. This means that instead of recognizing the revenue all at once, Bombs Away spreads the recognition over the period in which the franchisee receives the benefit of these services. This approach is consistent with Accounting Standards Update (ASU) to ASC 606, which provides a practical expedient for franchisors in recognizing revenue from contracts with customers.
The remaining portion of the franchisee fee that is not allocated to these pre-opening activities is recorded as Unearned Revenue. This unearned revenue is then recognized over the term of the franchise agreement. This indicates that Bombs Away defers the recognition of revenue associated with the franchise rights and other interrelated pre-opening activities, recognizing it gradually over the life of the agreement. This accounting treatment reflects the ongoing benefit that the franchisee receives from the Bombs Away franchise system and intellectual property.