What is the practical expedient mentioned in the context of Crown Gold Exchange's revenue recognition?
Crown_Gold_Exchange Franchise · 2024 FDDAnswer from 2024 FDD Document
luated to ensure that these criteria are met prior to recognition of revenue.
Specifically for franchisors, The Financial Accounting Standards Board (FASB) has issued an Accounting Standards Update (ASU) to ASC 606, Franchisors—'Revenue from Contracts with Customers (Subtopic 952-606): Practical Expedient' in 2022 which provides a new practical expedient that permits private company franchisors to account for preopening services provided to a franchisee as distinct from the franchise license if the services are consistent with those included in a predefined list within the guidance. The Company has elected to adopt this new standard.
GOLDMEMBER, LLC NOTES TO FINANCIAL STATEMENTS MAY 15, 2024
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
Unearned Revenue
The Company's primarily performance obligation under the franchise agreement mainly includes granting certain rights to access the Company's intellectual property and a variety of activities relating to opening a franchise unit, including initial training and other such activities commonly referred to collectively as "pre-opening activities", which are recognized as a single performance obligation. The Company expects that certain pre-opening activities provided to the franchisee will not be brand specific and will provide the franchisee with relevant general business information that is separate and distinct from the operation of a company-branded franchise unit. The portion of pre-opening activities that will be provided that is not brand specific is expected to be distinct as it will provide a benefit to the franchisee and is expected not to be highly interrelated or interdependent to the access of the Company's intellectual property, and therefore will be accounted for as a separate distinct performance obligation. All other pre-opening activities are expected to be highly interrelated and interdependent to the access of the Company's intellectual property and therefore will be accounted for as a single performance obligation, which is satisfied by granting certain rights to access the Company's intellectual property over the term of each franchise agreement.
The Company estimates the stand-alone selling price of pre-opening activities using an adjusted market assessment approach. The Company will first allocate the initial franchise fees and the fixed consideration, under the franchise agreement to the standalone selling price of the training services that are not brand specific and the residual, if any, to the right to access the Company's intellectual property. Consideration allocated to pre-opening activities, which are not brand specific are recognized ratably as those services are rendered. Consideration allocated to pre-opening activities included under Accounting Standards Update (ASU) to ASC 606, Franchisors—'Revenue from Contracts with Customers (Subtopic 952-606): Practical Expedient' is recognized when the related services have been rendered.
The remaining franchisee fee not allocated to pre-opening activities are recorded as Unearned Revenue and will be recognized over the term of the franchise agreement.
Income Taxes
The Company applies ASC 740 Income Taxes ("ASC 740").
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 38)
What This Means (2024 FDD)
According to the 2024 FDD, Crown Gold Exchange elected to adopt a new accounting standard that provides a practical expedient for private company franchisors. This practical expedient, issued by The Financial Accounting Standards Board (FASB) as an Accounting Standards Update (ASU) to ASC 606, allows Crown Gold Exchange to account for preopening services provided to a franchisee as distinct from the franchise license under certain conditions. Specifically, this applies if the services are consistent with those included in a predefined list within the guidance. This update was issued in 2022.
Crown Gold Exchange considers its primary performance obligation under the franchise agreement to be granting rights to access their intellectual property, along with pre-opening activities like initial training. Some of these pre-opening activities are not brand-specific and provide franchisees with general business information separate from the Crown Gold Exchange brand. These non-brand-specific activities are treated as a separate performance obligation because they benefit the franchisee and are not highly interrelated with accessing Crown Gold Exchange's intellectual property.
The company estimates the stand-alone selling price of pre-opening activities using an adjusted market assessment approach. Crown Gold Exchange allocates the initial franchise fees and fixed consideration under the franchise agreement to the stand-alone selling price of the training services that are not brand specific, with any residual amount allocated to the right to access the company's intellectual property. The consideration allocated to these non-brand-specific pre-opening activities is recognized ratably as the services are rendered. The remaining franchisee fee not allocated to pre-opening activities is recorded as Unearned Revenue and will be recognized over the term of the franchise agreement.
For a prospective Crown Gold Exchange franchisee, this accounting treatment means that the initial franchise fee is not entirely recognized as revenue by the franchisor upfront. Instead, a portion is allocated to pre-opening services and recognized as those services are provided. The remaining portion is recognized over the life of the franchise agreement. This approach can provide a more accurate picture of when Crown Gold Exchange earns its revenue, aligning it with the delivery of services and access to intellectual property over time.