What is the significance of Accounting Standards Update (ASU) to ASC 606 for Bombs Away franchisees?
Bombs_Away Franchise · 2024 FDDAnswer from 2024 FDD Document
valuated to ensure that these criteria are met prior to recognition of revenue.
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.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 35)
What This Means (2024 FDD)
According to Bombs Away's 2024 Franchise Disclosure Document, the Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU) to ASC 606 in 2021. This update, titled 'Franchisors—Revenue from Contracts with Customers (Subtopic 952-606): Practical Expedient,' allows private company franchisors like Bombs Away to account for pre-opening services provided to a franchisee as distinct from the franchise license itself. This is applicable if these services align with a predefined list within the provided guidance, and Bombs Away has chosen to adopt this standard.
For a Bombs Away franchisee, this means that the initial franchise fees and other fixed considerations under the franchise agreement will be allocated to the standalone selling price of training services that are not brand specific. Any remaining amount will be allocated to the right to access Bombs Away's intellectual property. The consideration allocated to these non-brand-specific pre-opening activities is recognized as revenue ratably as these services are rendered.
In practice, this accounting method affects how Bombs Away recognizes revenue related to the initial franchise fee. Instead of recognizing the entire fee upfront, Bombs Away recognizes revenue for the pre-opening activities as they provide those services. The remaining portion of the franchise fee, which is not allocated to pre-opening activities, is recorded as unearned revenue and is recognized over the term of the franchise agreement. This approach provides a more accurate reflection of when Bombs Away earns revenue, aligning it with the delivery of services and access to intellectual property over the life of the franchise agreement.