How does Coffee News determine the allowance for credit losses?

According to Coffee News's 2025 Franchise Disclosure Document, the company adopted FASB Accounting Standards Update (ASU) 2016-13 on January 1, 2024. This update, titled Financial Instruments—Credit Losses (Topic 326), modifies how expected claims and credit losses on financial instruments are measured. Specifically, Topic 326 mandates the measurement and recognition of expected versus incurred losses for financial assets held by the company. For Coffee News, these financial assets include franchisee accounts receivable.

In simpler terms, this means Coffee News must now account for potential credit losses (i.e., franchisees not paying what they owe) by estimating the losses they expect to incur over the lifetime of their receivables. This is a shift from only recognizing losses when they are actually incurred. The 2025 FDD states that the adoption of this ASU did not have a material impact on the company's financial statements.

For a prospective Coffee News franchisee, this accounting policy itself has no direct impact. However, it provides insight into how Coffee News manages its financial risks related to franchisees' payments. The fact that the adoption of ASU 2016-13 did not have a material impact could suggest that Coffee News has a history of low credit losses from its franchisees or that the potential losses are well-managed. Franchisees may want to inquire about the historical trends in accounts receivable and bad debt to better understand the financial health of Coffee News and the payment behavior of its franchisees.