What is the primary impact of ASC 606 on Crisp & Green's revenue recognition policies?
Crisp_Green Franchise · 2024 FDDAnswer from 2024 FDD Document
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 primary impact of ASC 606 on the company's revenue recognition policies involves changes in accounting for initial franchising fees and related commission expenses. Before January 2019, Crisp & Green recorded initial franchising fees as revenue and the associated commission expense at the beginning of the franchisee's operations.
However, with the adoption of ASC 606 in January 2019, Crisp & Green began recognizing initial franchise fees as revenue over the franchise term, typically 10 years, on a straight-line basis. The unrecognized portion of these initial franchising fees is recorded as deferred franchise fees. Similarly, commissions, considered incremental costs of obtaining a contract under ASC 606, are now capitalized as deferred franchise costs and amortized over the same franchise term.
In simpler terms, this means that instead of recognizing all the initial franchise fee revenue upfront, Crisp & Green spreads the recognition of this revenue over the life of the franchise agreement. This change also affects how Crisp & Green accounts for commission expenses, aligning them with the revenue recognition schedule. For a prospective franchisee, this accounting change primarily affects Crisp & Green's financial statements and may not directly impact their day-to-day operations. However, it provides a more accurate picture of how Crisp & Green recognizes revenue and expenses related to franchising over time.