What was the allowance for credit loss considered necessary for Burros Fries at December 31, 2023, and why?
Burros_Fries Franchise · 2024 FDDAnswer from 2024 FDD Document
MMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Receivables
Receivables (less the allowance for credit loss) are recorded at amount management expects to collect from balances outstanding at year-end. The amounts of receivables reported in the financial statements approximates fair value. The receivable represents the Company's unconditional right to receive consideration arising from their performance under contracts with franchisees. Management considers the probability of collection of receivables, taking into account specific circumstances of franchisees as well as general economic factors, when determining whether an allowance for credit loss is needed. Delinquent accounts are written off when they become uncollectible in management's judgment. Management considers all receivables to be collectible at December 31, 2023, therefore the allowance for credit loss is zero was considered necessary at December 31, 2023. Accounts receivable from franchise
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 53)
What This Means (2024 FDD)
According to Burros Fries' 2024 Franchise Disclosure Document, the allowance for credit loss considered necessary at December 31, 2023, was zero. This is because the management of Burros Fries considered all receivables to be collectible at that time. Receivables, less the allowance for credit loss, are recorded at the amount management expects to collect from outstanding balances at year-end.
Burros Fries assesses the probability of collecting receivables by considering the specific circumstances of franchisees and general economic factors to determine if an allowance for credit loss is needed. Delinquent accounts are written off when they are deemed uncollectible by the management's judgment.
Accounts receivable from franchisees were $22,863 as of January 1, 2022, and increased to $27,080 by December 31, 2023. This indicates an increase in the amounts owed to Burros Fries by its franchisees over that period. The fact that the allowance for credit loss was zero despite the outstanding receivables suggests that Burros Fries had confidence in the ability of its franchisees to pay their debts.
For a prospective franchisee, this indicates that Burros Fries has been experiencing timely payments from its franchisees. However, it is important to monitor this trend and evaluate the creditworthiness of current and future franchisees to ensure the continued financial health of the franchise system.