What is the relationship between the initial franchise fee and the unearned revenue for a Bombs Away franchise?
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 allocates the initial franchise fees to cover pre-opening activities such as training services that are not brand specific, and the right to access Bombs Away's intellectual property. The fees allocated to these pre-opening activities are recognized as revenue as the services are rendered. This means Bombs Away recognizes revenue from the initial franchise fee as they provide these initial services to the franchisee.
The portion of the initial franchise fee that is not allocated to these pre-opening activities is recorded as unearned revenue. This unearned revenue represents the remaining portion of the initial fee that Bombs Away has received but not yet earned through the provision of ongoing services and support.
Bombs Away recognizes this unearned revenue over the term of the franchise agreement. This means that over the life of the agreement, Bombs Away will gradually recognize the unearned revenue as earned revenue, reflecting the ongoing value and support provided to the franchisee. This accounting practice aligns with standard accounting principles, which require revenue to be recognized when it is earned rather than simply when cash is received.