How does Creative World School recognize royalties from franchisees?
Creative_World_School Franchise · 2025 FDDAnswer from 2025 FDD Document
Royalties receivable are uncollateralized franchisee obligations for franchise royalties and are due on the first day of the month following the sale in accordance with the franchise agreement.
Royalties receivable are stated at the amount management expects to collect from balances outstanding at year end. The carrying amount of royalties receivable is reduced by an allowance for credit losses based on historical experience adjusted for current conditions and reasonable forecasts taking into account geographic and industry-specific economic factors. The Company also considers any specific customer collection issues. At origination, the Company evaluates credit risk based on a variety of credit quality factors including prior payment experience, customer financial information, credit rating, probabilities of default, industry trends and other internal metrics. On a continuing basis, data for each major customer is regularly reviewed based on past-due status to evaluate the adequacy of the allowance for credit losses.
Management provides for probable uncollectible amounts through a charge to earnings and a credit to the allowance for credit losses based on its assessment of the current status of individual accounts. Balances that are still outstanding after management has used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to royalties receivable. There was no allowance for credits losses for the years ended December 31, 2024, 2023, and 2022.
Source: Item 23 — RECEIPTS (FDD pages 80–247)
What This Means (2025 FDD)
According to the 2025 Creative World School FDD, the company recognizes royalties receivable as uncollateralized franchisee obligations. These royalties are due on the first day of the month following the sale, as outlined in the franchise agreement. This means that Creative World School expects franchisees to pay royalties promptly based on their sales performance.
Creative World School states royalties receivable at the amount management expects to collect from outstanding balances at year end. To account for potential non-payment, the carrying amount of royalties receivable is reduced by an allowance for credit losses. This allowance is determined based on historical experience, current conditions, and reasonable forecasts, considering geographic and industry-specific economic factors. The company also evaluates individual customer collection issues and assesses credit risk using factors like prior payment experience, customer financial information, credit ratings, and industry trends.
On a continuing basis, Creative World School reviews data for each major customer, particularly their past-due status, to evaluate the adequacy of the allowance for credit losses. Management provides for probable uncollectible amounts by charging earnings and crediting the allowance for credit losses, based on their assessment of individual accounts. Balances that remain outstanding after reasonable collection efforts are written off through a charge to the valuation allowance and a credit to royalties receivable. The FDD notes that there was no allowance for credit losses for the years ended December 31, 2024, 2023, and 2022.
For a prospective Creative World School franchisee, this accounting practice indicates that the franchisor is proactive in managing and accounting for royalty payments. The franchisee should maintain accurate sales records and ensure timely royalty payments to avoid any collection issues or negative impact on their credit assessment by the franchisor. Understanding these financial processes is crucial for maintaining a healthy financial relationship with Creative World School.