What accounting guidance did Carbones Pizzeria adopt regarding credit losses?
Carbones_Pizzeria Franchise · 2025 FDDAnswer from 2025 FDD Document
Financial Statements For the Year Ended October 31, 2024**
2. Summary of Significant Accounting Policies (Continued)
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with original maturities of three months or less to be cash equivalents. There were no cash equivalents at October 31, 2024.
Accounts Receivable and Allowance for Credit Losses
Accounts receivable for royalty fees from franchisees are due on or before the first day of each week for the sales during the preceding week and accounts receivable for advertising fee royalties from franchisees are due on or before Tuesday of each week for the sales during the preceding week. All receivables not received on time receive additional scrutiny from management and may be charged interest at rates up to 12% annually.
The Financial Accounting Standards Board ("FASB") issued guidance FASB Accounting Standards Codification ("ASC") 326 which changed how entities measure credit losses for most financial assets and certain other instruments that aren't measured at fair value through net income. The most significant change in this standard is a shift from the incurred loss model to the expected loss model. Under the standard, disclosures are required to provide users of the financial statements with useful information in analyzing an entity's exposure to credit risk and the measurement of credit losses. Financial assets held by the Company that are subject to the guidance in FASB ASC 326 are trade accounts receivable. The impact of the adoption was not considered material to the financial statements and primarily resulted in enhanced disclosures only.
The Company's allowance for expected credit losses, is Management's best estimate of the amount of probable credit losses in its existing accounts receivable. The Company reviews its allowance for expected credit losses periodically. Management determines an allowance based on historical experience and then analyzes individual past due balances for collectability based on current conditions and reasonable and supportable forecasts.
In addition, if Management believes it is probable a receivable will not be recovered, i
Source: Item 22 — CONTRACTS (FDD page 30)
What This Means (2025 FDD)
According to Carbones Pizzeria's 2025 Franchise Disclosure Document, the company adopted FASB ASC 326 as of January 1, 2023, to measure credit losses. This guidance changed the measurement from an incurred loss model to an expected loss model. The FDD states that the adoption of this standard did not have a material impact on the financial statements but primarily resulted in enhanced disclosures.
For Carbones Pizzeria, financial assets subject to this guidance are trade accounts receivable. These receivables are typically royalty and advertising fees due from franchisees, with specific due dates each week. Receivables not received on time are subject to additional scrutiny and may incur interest at rates up to 12% annually.
The company's allowance for expected credit losses represents management's best estimate of probable credit losses within its existing accounts receivable. This allowance is periodically reviewed, considering historical experience, current conditions, and reasonable forecasts. As of October 31, 2024, the allowance for credit losses for accounts receivable amounted to $175,595. If management believes a receivable is unrecoverable, it is charged off against this allowance.
This accounting policy is important for prospective franchisees to understand because it reflects how Carbones Pizzeria manages and accounts for potential non-payment of fees. While the initial adoption of FASB ASC 326 was not considered material, the ongoing assessment and allowance for credit losses can impact the company's financial statements and, indirectly, the financial health of the franchise system.