What accounting standard does Chocolate Fish Coffee use for revenue recognition?
Chocolate_Fish_Coffee Franchise · 2024 FDDAnswer from 2024 FDD Document
B – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("US GAAP"). As a result, the Company records revenue when earned and expenses when incurred. The Company has adopted the calendar year as its basis of reporting.
Use of Estimates
The preparation of financial statements, in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and the disclosures of contingent assets and liabilities and other items, as well as the reported revenues and expenses. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and any cash equivalents include all cash balances, and highly liquid investments with maturities of three months or less when purchased.
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 2022 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 41)
What This Means (2024 FDD)
According to the 2024 Franchise Disclosure Document, Chocolate Fish Coffee prepares its financial statements in accordance with accounting principles generally accepted in the United States of America ("US GAAP"). This means Chocolate Fish Coffee records revenue when earned and expenses when incurred.
Chocolate Fish Coffee'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 Fish Coffee 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 determination involves making assumptions about these factors.
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 2022. 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, which Chocolate Fish Coffee has elected to adopt.
Chocolate Fish Coffee estimates the stand-alone selling price of pre-opening activities using an adjusted market assessment approach. The company allocates the initial franchise fees and fixed consideration under the franchise agreement to the standalone selling price of training services that are not brand specific, with any residual amount allocated to the right to access Chocolate Fish Coffee's intellectual property. Consideration allocated to pre-opening activities that are not brand specific is recognized ratably 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.