What is the significance of Accounting Standards Update (ASU) to ASC 606 for Crown Gold Exchange?
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 Crown Gold Exchange's 2024 Franchise Disclosure Document, the Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU) to ASC 606 in 2022. This update, titled 'Revenue from Contracts with Customers (Subtopic 952-606): Practical Expedient,' provides a practical way for private company franchisors like Crown Gold Exchange to account for pre-opening services provided to a franchisee. This is applicable if the services align with a predefined list within the guidelines. Crown Gold Exchange has elected to adopt this new standard.
This means that Crown Gold Exchange can treat pre-opening services as distinct from the franchise license under certain conditions. The company's primary performance obligation under the franchise agreement includes granting rights to access their intellectual property and activities related to opening a franchise unit, such as initial training. These activities are collectively referred to as "pre-opening activities" and are generally recognized as a single performance obligation. However, Crown Gold Exchange expects that some pre-opening activities will not be brand-specific and will provide franchisees with general business information separate from the operation of a Crown Gold Exchange franchise.
The portion of pre-opening activities that are not brand-specific will be treated as a separate performance obligation because they benefit the franchisee and are not highly interrelated with access to Crown Gold Exchange's intellectual property. The company estimates the stand-alone selling price of these pre-opening activities using an adjusted market assessment approach. Initial franchise fees and fixed consideration under the franchise agreement are allocated 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. Consideration allocated to these non-brand-specific pre-opening activities is recognized ratably as the services are rendered, while consideration allocated to pre-opening activities under ASU to ASC 606 is recognized when the related services have been rendered. The remaining franchisee fee not allocated to pre-opening activities is recorded as Unearned Revenue and recognized over the term of the franchise agreement.
For a prospective franchisee, this accounting treatment affects how Crown Gold Exchange recognizes revenue related to the initial franchise fee. By adopting the ASU, Crown Gold Exchange can recognize revenue from certain pre-opening activities sooner, rather than deferring it over the entire franchise term. This could potentially impact the company's financial statements and reported profitability in the early years of a franchise agreement. Franchisees should understand how these accounting standards affect the franchisor's financial reporting, as it can provide insights into the franchisor's financial health and revenue recognition practices.