What assumptions are involved in determining if fees are fixed or determinable and collection is reasonably assured for Chocolate Bash?
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 Chocolate Bash's 2024 Franchise Disclosure Document, the determination of whether fees are fixed or determinable and whether collection is reasonably assured involves the use of assumptions. Arrangement terms and customer information are evaluated to ensure that these criteria are met before Chocolate Bash recognizes revenue. This is in accordance with Accounting Standards Codification (ASC) Topic 606.
For a Chocolate Bash franchisee, this means that the franchisor must make certain judgments about the franchisee's ability and willingness to pay the required fees. These assumptions are based on the specific arrangement terms outlined in the franchise agreement and the information Chocolate Bash gathers about the franchisee. If Chocolate Bash deems that the fees are not fixed or that collection is not reasonably assured, they will not recognize the revenue until those conditions are met.
This policy affects how Chocolate Bash accounts for initial franchise fees and ongoing royalties. It ensures that Chocolate Bash only recognizes revenue when it is confident it has earned it and will receive payment. Franchisees should understand that Chocolate Bash's revenue recognition is tied to these assumptions, which are based on accounting standards and the franchisor's assessment of the franchisee's financial situation and the terms of their agreement.
In 2021, 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' 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. Chocolate Bash has elected to adopt this new standard.