Under what conditions does Crown Gold Exchange recognize revenue?
Crown_Gold_Exchange Franchise · 2024 FDDAnswer from 2024 FDD Document
h maturities of three months or less when purchased.
Revenue Recognition
Revenues are primarily derived from franchise fees (one-time and recurring monthly fees). In accordance with Accounting Standards Codification (ASC) Topic 606, Revenue will be recognized when persuasive evidence of an arrangement exists, delivery has occurred, or services have been rendered, the seller's price to the buyer is fixed or determinable, and collectability is reasonable assured. The determination of whether fees and fixed or determinable and collection is reasonable assured involves the use of assumptions. Arrangement terms and customer information are evaluated 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.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 38)
What This Means (2024 FDD)
According to Crown Gold Exchange's 2024 Franchise Disclosure Document, the company primarily derives its revenue from franchise fees, which include both one-time and recurring monthly fees. Crown Gold Exchange adheres to Accounting Standards Codification (ASC) Topic 606 for revenue recognition. This means that Crown Gold Exchange recognizes revenue when several conditions are met: there must be persuasive evidence of an arrangement, delivery must have occurred or services have been rendered, the price to the buyer must be fixed or determinable, and collectability must be reasonably assured. The determination of whether these fees are fixed or determinable and whether collection is reasonably assured involves making assumptions and evaluating arrangement terms and customer information to ensure these criteria are met before recognizing revenue.
Specifically, Crown Gold Exchange uses an adjusted market assessment approach to estimate the stand-alone selling price of pre-opening activities. The initial franchise fees and any fixed consideration under the franchise agreement are allocated to the standalone selling price of training services that are not brand specific. Any residual amount is then allocated to the right to access Crown Gold Exchange's intellectual property. The consideration allocated to these non-brand-specific pre-opening activities is recognized ratably as those services are rendered. Furthermore, 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 that is not allocated to pre-opening activities is recorded as Unearned Revenue. This unearned revenue is then recognized over the term of the franchise agreement. This approach ensures that Crown Gold Exchange recognizes revenue in a manner that accurately reflects the delivery of services and rights to the franchisee over the life of the agreement. This is a common practice in franchising, where initial fees often cover a bundle of services and rights that extend beyond the initial setup phase.