What is Carbones Pizzeria's allowance for expected credit losses based on?
Carbones_Pizzeria Franchise · 2025 FDDAnswer from 2025 FDD Document
ounts 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's allowance for expected credit losses is based on management's best estimate of probable credit losses in its existing accounts receivable. Management periodically reviews this allowance. The determination of the allowance is based on historical experience, analysis of individual past due balances for collectability, current conditions, and reasonable and supportable forecasts. If management believes 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.
For a prospective Carbones Pizzeria franchisee, this means that the company actively manages its credit risk by estimating potential losses from franchisees who may not pay their dues. This process is guided by accounting standards (FASB ASC 326) that require shifting from an incurred loss model to an expected loss model. The company's approach includes reviewing historical payment patterns, assessing the current financial health of franchisees with outstanding balances, and making informed predictions about future collectability.
The allowance for credit losses is a standard accounting practice to account for potential uncollectible amounts. The fact that Carbones Pizzeria has an allowance of $175,595 for the year ended October 31, 2024, indicates that they anticipate some level of credit losses from franchisees. This figure can give a potential franchisee an idea of the credit risk associated with the existing franchise network. It is important to note that receivables not received on time may be charged interest at rates up to 12% annually, which could incentivize timely payments from franchisees.
Prospective franchisees should consider this allowance for credit losses as part of their due diligence. Understanding how Carbones Pizzeria manages and accounts for potential credit losses can provide insights into the financial stability of the franchise system and the potential risks associated with franchisee payments. It also highlights the importance of adhering to the payment terms outlined in the franchise agreement to avoid additional scrutiny and potential interest charges.