What was the primary result of adopting FASB ASC 326 for Carbones Pizzeria?
Carbones_Pizzeria Franchise · 2025 FDDAnswer from 2025 FDD Document
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.
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, which changed how entities measure credit losses, was not considered material to the financial statements. The primary result of adopting this standard was enhanced disclosures. This standard shifts 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.
For a prospective franchisee, this means that the way Carbones Pizzeria accounts for potential credit losses from franchisees' royalty and advertising fee payments has changed. While the change itself didn't significantly impact the financial statements, it did lead to more detailed reporting about the company's exposure to credit risk. This provides franchisees with more transparency into how Carbones Pizzeria manages potential financial risks related to collecting payments from franchisees.
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 advertising fee royalties are due on or before Tuesday of each week for the sales during the preceding week. Receivables not received on time are subject to additional scrutiny and may be charged interest at rates up to 12% annually. For the year ended October 31, 2024, the allowance for credit losses for accounts receivable amounted to $175,595. As of January 1, 2023, accounts receivable was $232,832. For the year ended October 31, 2023, the allowance for credit losses for accounts receivable amounted to $109,133.
This change in accounting standards and the enhanced disclosures could be beneficial for franchisees as it provides a clearer picture of the financial health and risk management practices of Carbones Pizzeria. Franchisees can use this information to assess the stability of the franchise system and make informed decisions about their investment.