What is the practical expedient that Bombs Away uses for revenue recognition?
Bombs_Away Franchise · 2024 FDDAnswer from 2024 FDD Document
Specifically for franchisors, The Financial Accounting Standards Board (FASB) has issued an Accounting Standards Update (ASU) to ASC 606, Franchisors—'Revenue from Contracts with Customers (Subtopic 952-606): Practical Expedient' in 2021 which provides a new practical expedient that permits private company franchisors to account for preopening services provided to a franchisee as distinct from the franchise license if the services are consistent with those included in a predefined list within the guidance. 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. 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 has elected to adopt a new accounting standard that provides a practical expedient specifically for franchisors. This standard, issued by The Financial Accounting Standards Board (FASB) as an Accounting Standards Update (ASU) to ASC 606, allows private company franchisors to account for preopening services provided to a franchisee as distinct from the franchise license. This is permissible if the services are consistent with those included in a predefined list within the guidance.
Bombs Away considers its primary performance obligation under the franchise agreement to include granting rights to access their intellectual property and various pre-opening activities such as initial training. These pre-opening activities are generally recognized as a single performance obligation. However, Bombs Away expects that certain pre-opening activities provided to the franchisee will not be brand specific and will offer relevant general business information separate from the Bombs Away franchise.
The portion of pre-opening activities that are not brand specific are considered distinct because they benefit the franchisee and are not highly interrelated or interdependent with access to Bombs Away's intellectual property. Therefore, these activities are accounted for as a separate distinct performance obligation. All other pre-opening activities that are highly interrelated and interdependent with access to Bombs Away's intellectual property are accounted for as a single performance obligation, which is satisfied by granting rights to access the company's intellectual property over the term of the franchise agreement.
Bombs Away estimates the stand-alone selling price of pre-opening activities using an adjusted market assessment approach. The company first allocates the initial franchise fees and fixed consideration under the franchise agreement to the stand-alone selling price of the training services that are not brand specific. Any residual 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 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 is recorded as Unearned Revenue and will be recognized over the term of the franchise agreement.