How did Cicis implement the adoption of ASC 326 regarding financial instruments—credit losses?
Cicis Franchise · 2025 FDDAnswer from 2025 FDD Document
| ------------- | ||
|---|---|---|
| Cash and cash equivalents | $ 1,854,735 | $ 2,931,372 |
| Cash and cash equivalents—marketing fund, restricted | 434,199 | 771,794 |
| $ 2,288,934 | $ 3,703,166 |
Accounts receivable: Accounts receivable consist primarily of accrued royalty fees and marketing contribution receivables, generally collected weekly in arrears, and vendor rebates. Unpaid accounts receivable with invoice dates over 30 days are non-interest bearing. All accounts receivable are entered into on an unsecured basis. Accounts receivable, trade receivables at December 31, 2022 were $186,610. Accounts receivable, marketing fund, restricted at December 31, 2022 were $1,556,337.
Note 1. Organization and Summary of Significant Accounting Policies (Continued)
The Company adopted Accounting Standards Codification (ASC) 326, Financial Instruments—Credit Losses (ASC 326), as of January 1, 2023, with the cumulative-effect transition method with the required prospective approach. The measurement of expected credit losses under the current expected credit loss (CECL) methodology is applicable to financial assets measured at amortized cost, which include accounts receivable. An allowance for credit losses under the CECL methodology is determined using the loss-rate approach and measured on a collective (pool) basis when similar risk characteristics exist. Where financial instruments do not share risk characteristics, they are evaluated on an individual basis. The adoption of ASC 326 had no material impact on the Company's combined financial statements.
Consistent with ASC 326, the Company offsets accounts receivable with an allowance for credit losses. The allowance for credit losses is the Company's best estimate of the amount of probable credit losses in the Company's existing accounts receivable and is based on historical loss patterns, the number of days that billings are past due, and an evaluation of the potential risk of loss associated with specific accounts. Account balances are charged against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. Recoveries of accounts receivable previously written off are recorded when received. As of December 31, 2024 and 2023, the Company recorded an allowance for credit losses of $30,166 and $0, respectively.
Source: Item 20 — OUTLETS AND FRANCHISEE INFORMATION (FDD pages 58–64)
What This Means (2025 FDD)
According to Cicis's 2025 Franchise Disclosure Document, the company adopted Accounting Standards Codification (ASC) 326, Financial Instruments—Credit Losses, as of January 1, 2023, utilizing the cumulative-effect transition method with a prospective approach. This standard pertains to the measurement of expected credit losses for financial assets measured at amortized cost, including accounts receivable. Cicis determines the allowance for credit losses under the current expected credit loss (CECL) methodology using a loss-rate approach, measured collectively when similar risk characteristics exist, and individually when they do not. The adoption of ASC 326 had no material impact on the company's combined financial statements.
Cicis offsets accounts receivable with an allowance for credit losses, estimating probable credit losses in existing accounts receivable based on historical loss patterns, the number of days billings are past due, and an evaluation of potential loss risk associated with specific accounts. Account balances are charged against the allowance after exhausting all collection means and when recovery potential is considered remote. Recoveries of previously written-off accounts receivable are recorded upon receipt. As of December 31, 2024, the company recorded an allowance for credit losses of $30,166, while the allowance was $0 as of December 31, 2023.
Before adopting ASC 326, Cicis maintained an allowance for doubtful accounts to reserve for potentially uncollectible receivables. As of December 31, 2022, the company recorded an allowance for doubtful accounts of $0. This change reflects a shift in how Cicis accounts for potential credit losses, moving from a method focused on probable losses to one that anticipates expected losses over the life of the financial instrument. The fact that the allowance for credit losses was $0 in both 2022 and 2023, but then increased to $30,166 in 2024, suggests a change in the risk profile of Cicis's accounts receivable or a more conservative approach to estimating potential losses under the new standard.