When does Bombs Away recognize consideration allocated to pre-opening activities that are not brand specific?
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.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 35)
What This Means (2024 FDD)
According to Bombs Away's 2024 Franchise Disclosure Document, the company recognizes consideration allocated to pre-opening activities that are not brand specific as those services are rendered. Bombs Away estimates the stand-alone selling price of pre-opening activities using an adjusted market assessment approach. The company allocates initial franchise fees and fixed consideration under the franchise agreement to the stand-alone selling price of training services that are not brand specific. Any residual amount is then allocated to the right to access the company's intellectual property.
Bombs Away has adopted Accounting Standards Update (ASU) to ASC 606, Franchisors—'Revenue from Contracts with Customers (Subtopic 952-606): Practical Expedient'. This update allows Bombs Away to account for preopening services as distinct from the franchise license if the services are consistent with those included in a predefined list within the guidance.
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.
For a potential Bombs Away franchisee, this means that the portion of the initial franchise fee designated for general business training (not specific to the Bombs Away brand) is recognized by Bombs Away as revenue ratably as they provide those training services. The remaining portion of the franchise fee, related to brand-specific training and access to Bombs Away's intellectual property, is recognized over the term of the franchise agreement.