How does Bor Restoration establish an allowance for doubtful accounts?
Bor_Restoration Franchise · 2024 FDDAnswer from 2024 FDD Document
) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
For purposes of the statement of cash flows, cash and cash equivalents include demand deposits, and other highly liquid investments with original maturities of three months or less. The Company does not have any cash equivalents.
Accounts Receivable
Accounts receivable consist of amounts invoiced to franchises and are presented net of an allowance for credit losses, which is an estimate of amounts that may not be collectible. The Company separates accounts receivable into risk pools based on their aging. In determining the amount of the allowance as of the balance sheet dates, the Company develops a loss rate for each risk pool. The loss rate is based on management's historical collection experience, adjusted for management's expectations about current and future economic conditions and based on a specific assessment of the creditworthiness of the franchise. As of December 31, 2023, the loss rate applied to the pools is 1% of related sales. All amounts deemed to be uncollectible are charged against the allowance for doubtful accounts in the period that determination is made. As of December 31, 2023, there was no allowance for credit losses on accounts receivable balances as it is not significant to the financial statements.
Source: Item 23 — Receipts (FDD pages 40–202)
What This Means (2024 FDD)
According to Bor Restoration's 2024 Franchise Disclosure Document, the company establishes an allowance for doubtful accounts based on a specific assessment of the creditworthiness of the franchisee. This allowance is used to account for accounts receivable that may not be fully collectible. All amounts deemed uncollectible are charged against this allowance during the period the determination is made. For the years ending December 31, 2022, 2021 and 2020, there was no allowance for doubtful accounts on accounts receivable balances.
For the year ending December 31, 2023, the company separates accounts receivable into risk pools based on their aging. In determining the amount of the allowance as of the balance sheet dates, the company develops a loss rate for each risk pool. The loss rate is based on management's historical collection experience, adjusted for management's expectations about current and future economic conditions and based on a specific assessment of the creditworthiness of the franchise. As of December 31, 2023, the loss rate applied to the pools is 1% of related sales. As of December 31, 2023, there was no allowance for credit losses on accounts receivable balances as it is not significant to the financial statements. There was no allowance for doubtful accounts on accounts receivable balances for the years ended December 31, 2022 and 2021.
This accounting practice means that Bor Restoration actively monitors the creditworthiness of its franchisees and adjusts its financial statements to reflect potential losses from uncollectible accounts. For a prospective franchisee, this indicates that Bor Restoration assesses the financial stability of its franchisees and has a mechanism in place to account for potential non-payment of receivables. The fact that there was no significant allowance needed in recent years could be a positive sign, suggesting that franchisees are generally meeting their financial obligations to the company.