How did the adoption of FASB ASC 326 impact Carbones Pizzeria's disclosures?
Carbones_Pizzeria Franchise · 2025 FDDAnswer from 2025 FDD Document
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, it is charged off against the allowance. For the year ended October 31, 2024, the allowance for credit losses for accounts receivable amounted to $175,595.
Inventories
Inventories consist primarily of items held at the restaurant and are valued at the lower of cost or net realizable value with cost determined using the first-in, first-out method.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and amortization and are depreciated or amortized using the straight-line method.
Source: Item 22 — CONTRACTS (FDD page 30)
What This Means (2025 FDD)
According to Carbones Pizzeria's 2025 Franchise Disclosure Document, the adoption of FASB ASC 326, concerning the measurement of credit losses for financial assets, primarily resulted in enhanced disclosures. This accounting standards update shifts the focus from an incurred loss model to an expected loss model. The financial assets held by Carbones Pizzeria that are subject to this guidance are trade accounts receivable. Carbones Pizzeria adopted this standard effective January 1, 2023, and the impact was not considered material to the financial statements.
For a prospective Carbones Pizzeria franchisee, this means that the way Carbones Pizzeria accounts for potential credit losses from franchisees' royalty and advertising fee payments has changed. While the adoption of FASB ASC 326 didn't significantly impact the financial statements themselves, it did lead to more detailed disclosures about the company's exposure to credit risk and how they measure potential credit losses. This provides more transparency to potential investors and franchisees.
The allowance for expected credit losses is Management's best estimate of potential credit losses in its existing accounts receivable. Carbones Pizzeria 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. For the year ended October 31, 2024, the allowance for credit losses for accounts receivable amounted to $175,595.
It's worth noting that 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. This highlights the importance of franchisees making timely payments to avoid potential interest charges and increased scrutiny.