What accounting standard did Crisp & Green adopt for revenue recognition in 2019?
Crisp_Green Franchise · 2024 FDDAnswer from 2024 FDD Document
The Financial Accounting Standards Board (FASB) issued new guidance that created Topic 606, Revenue from Contracts with Customers, which requires the recognition of revenue when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled in exchange for those goods or services. The guidance also added Subtopic 340-40, Other Assets and Deferred Costs-Contracts with Customers, to the ASC to require the deferral of incremental costs of obtaining a contract with a customer. The Company adopted the requirements of Topic 606 and Subtopic 340-40 for the year ended December 31, 2019, utilizing the modified retrospective method of transition.
The primary impact of ASC 606 on the Company's revenue recognition policies is a change in the accounting for initial franchising fees and related commission expense. Upon the initial sale of a franchise, the Company is obligated to provide franchisees access to certain proprietary programs, written materials, trademarks, tools and support associated with their franchise business. The Company previously recorded the initial franchising fees as revenue and the related commission expense at the beginning of franchisee operations. Beginning in January 2019, under ASC 606, initial franchise fees were recognized as the Company satisfied the performance obligation over the franchise term on a straight-line basis, which is generally 10 years. The unrecognized portion of initial franchising fees was recorded as deferred franchise fees. Similarly, commissions are an incremental cost of obtaining a contract under ASC 606, which are capitalized as deferred franchise costs and amortized over the term of the franchise agreement.
Source: Item 23 — RECEIPTS (FDD pages 66–252)
What This Means (2024 FDD)
According to Crisp & Green's 2024 Franchise Disclosure Document, the company adopted Topic 606, Revenue from Contracts with Customers, issued by the Financial Accounting Standards Board (FASB) for revenue recognition, effective December 31, 2019. This standard requires revenue recognition when promised goods or services are transferred to customers, reflecting the consideration the company expects to receive in exchange. Additionally, Subtopic 340-40, Other Assets and Deferred Costs-Contracts with Customers, was added to the ASC, mandating the deferral of incremental costs associated with obtaining a contract with a customer. Crisp & Green utilized the modified retrospective method of transition.
For Crisp & Green, the primary impact of ASC 606 involves changes in accounting for initial franchising fees and related commission expenses. Previously, Crisp & Green recorded initial franchising fees as revenue and commission expenses at the beginning of franchisee operations. However, starting in January 2019, under ASC 606, initial franchise fees are recognized as the company satisfies its performance obligation over the franchise term, typically 10 years, on a straight-line basis. The unrecognized portion of these fees is recorded as deferred franchise fees. Similarly, commissions, considered incremental costs of obtaining a contract, are capitalized as deferred franchise costs and amortized over the term of the franchise agreement.
For a prospective Crisp & Green franchisee, this accounting change means that the initial franchise fee you pay will not be immediately recognized as revenue by Crisp & Green. Instead, it will be recognized gradually over the 10-year franchise term. This approach provides a more accurate reflection of when Crisp & Green fulfills its obligations to support your franchise. Additionally, the commissions Crisp & Green pays to acquire your franchise agreement are also spread out over the 10-year term, aligning the expense with the period of benefit. This accounting treatment can affect Crisp & Green's reported financial performance in the early years of a franchise agreement, so it's important to understand how these changes impact their financial statements.