What specific subtopic is referenced in the Accounting Standards Update (ASU) that Chocolate Bash uses?
Chocolate_Bash Franchise · 2024 FDDAnswer from 2024 FDD Document
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 Accounting Standards Update (ASU) relates to revenue recognition from contracts with customers, specifically for franchisors. The Financial Accounting Standards Board (FASB) issued this update to ASC 606, titled '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.
Specifically, Chocolate Bash can treat preopening services as distinct from the franchise license if these services align with a predefined list within the ASU guidance. Chocolate Bash has chosen to adopt this new accounting standard. This means that Chocolate Bash can account for certain pre-opening activities, such as training, separately from the franchise license itself, provided these activities are consistent with those included in the predefined list within the ASU guidance.
This accounting treatment affects how Chocolate Bash recognizes revenue related to these pre-opening activities. Consideration allocated to pre-opening activities that are not brand specific is recognized as those services are rendered. The remaining franchisee fee not allocated to pre-opening activities is recorded as Unearned Revenue and will be recognized over the term of the franchise agreement. This distinction is important for franchisees as it clarifies how Chocolate Bash accounts for the initial fees paid and how these fees are recognized as revenue over time.
For a prospective Chocolate Bash franchisee, understanding this accounting policy is crucial because it impacts the franchisor's financial statements and provides insight into how Chocolate Bash recognizes revenue from initial franchise fees and ongoing royalties. It also highlights the portion of the initial fee that is allocated to pre-opening services and how that revenue is recognized as those services are delivered.