What 'Topic' is referenced in the Accounting Standards Codification (ASC) that Chocolate Bash uses?
Chocolate_Bash Franchise · 2024 FDDAnswer from 2024 FDD Document
FICANT ACCOUNTING POLICIES (cont.)
Revenue Recognition
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.
Unearned Revenue
The Company's primarily performance obligation under the franchise agreement mainly includes granting certain rights to access the Company's intellectual property and a variety of activities relating to opening a franchise unit, including initial training and other such activities commonly referred to collectively as "pre-opening activities", which are recognized as a single performance obligation.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 38)
What This Means (2024 FDD)
According to the 2024 Chocolate Bash Franchise Disclosure Document, the specific Accounting Standards Codification (ASC) topic referenced is Topic 606, which pertains to revenue recognition. Chocolate Bash recognizes revenue primarily from franchise fees, both one-time and recurring monthly fees.
The FDD states that Chocolate Bash follows ASC Topic 606, meaning that revenue is recognized when there is evidence of an arrangement, delivery has occurred or services have been rendered, the price is fixed, and collectability is reasonably assured. This involves making assumptions to determine if these criteria are met before recognizing revenue.
The Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU) to ASC 606, specifically for franchisors, allowing private companies to account for pre-opening services as distinct from the franchise license under certain conditions. Chocolate Bash has adopted this new standard. Consideration allocated to pre-opening activities included under Accounting Standards Update (ASU) to ASC 606, Franchisors—'Revenue from Contracts with Customers (Subtopic 952-606): Practical Expedient' is recognized when the related services have been rendered. The remaining franchisee fee not allocated to pre-opening activities are recorded as Unearned Revenue and will be recognized over the term of the franchise agreement.