What accounting standard does Chocolate Bash use for revenue recognition?
Chocolate_Bash Franchise · 2024 FDDAnswer from 2024 FDD Document
Revenues are primarily derived from franchise fees (one-time and recurring monthly fees). In accordance with Accounting Standards Codification (ASC) Topic 606, Revenue will be recognized when persuasive evidence of an arrangement exists, delivery has occurred, or services have been rendered, the seller's price to the buyer is fixed or determinable, and collectability is reasonable assured. The determination of whether fees and fixed or determinable and collection is reasonable assured involves the use of assumptions. Arrangement terms and customer information are evaluated to ensure that these criteria are met prior to recognition of revenue.
Specifically for franchisors, The Financial Accounting Standards Board (FASB) has issued an Accounting Standards Update (ASU) to ASC 606, Franchisors—'Revenue from Contracts with Customers (Subtopic 952-606): Practical Expedient' in 2021 which provides a new practical expedient that permits private company franchisors to account for preopening services provided to a franchisee as distinct from the franchise license if the services are consistent with those included in a predefined list within the guidance. The Company has elected to adopt this new standard.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 38)
What This Means (2024 FDD)
According to the 2024 Chocolate Bash FDD, the company prepares its financial statements in accordance with accounting principles generally accepted in the United States of America (US GAAP). This means Chocolate Bash records revenue when it is earned and expenses when they are incurred. This is a standard practice ensuring that financial statements are consistent and comparable across different companies.
Chocolate Bash's revenues are primarily derived from franchise fees, both one-time and recurring monthly fees. The company follows Accounting Standards Codification (ASC) Topic 606 for revenue recognition. Under these guidelines, Chocolate Bash recognizes revenue when there is persuasive evidence of an arrangement, delivery has occurred or services have been rendered, the price is fixed or determinable, and collectability is reasonably assured. This involves evaluating arrangement terms and customer information to ensure these criteria are met before recognizing revenue.
Specifically for franchisors, the Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU) to ASC 606, Franchisors—'Revenue from Contracts with Customers (Subtopic 952-606): Practical Expedient' in 2021. This update provides a practical way for private company franchisors to account for preopening services provided to a franchisee as distinct from the franchise license if the services are consistent with those included in a predefined list within the guidance. Chocolate Bash has elected to adopt this new standard.
For a prospective franchisee, understanding these accounting policies is crucial. It clarifies when and how Chocolate Bash recognizes revenue from franchise fees, which can impact the company's reported financial performance. The adoption of the FASB update also indicates how Chocolate Bash accounts for pre-opening services, potentially affecting the initial investment and ongoing fees for franchisees.