Under what accounting standard does Crown Gold Exchange recognize consideration allocated to pre-opening activities?
Crown_Gold_Exchange Franchise · 2024 FDDAnswer from 2024 FDD Document
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"). Deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial statement reported amounts at each period end, based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 38)
What This Means (2024 FDD)
According to the 2024 Franchise Disclosure Document, Crown Gold Exchange recognizes consideration allocated to pre-opening activities under Accounting Standards Update (ASU) to ASC 606, Franchisors—'Revenue from Contracts with Customers (Subtopic 952-606): Practical Expedient'. This standard is applied when the related services have been rendered.
Specifically, the Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU) to ASC 606 in 2022, which provides a practical way for private company franchisors to account for pre-opening services. This update allows Crown Gold Exchange to treat pre-opening services as distinct from the franchise license if the services are consistent with a predefined list within the guidance, which the company has elected to adopt.
Crown Gold Exchange allocates the initial franchise fees and fixed consideration to the standalone selling price of training services that are not brand specific. Any residual amount is 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. 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.