On what basis does Deka Lash recognize revenues for initial franchise fees?
Deka_Lash Franchise · 2024 FDDAnswer from 2024 FDD Document
ons reflected in the Company's tax filings and does not believe that any material uncertain tax positions exist.
Concentration of Credit Risk
The Company maintains cash and cash equivalents with financial institutions. These institutions are believed by management to be creditworthy and are insured by Federal Deposit Insurance Corporation (FDIC). Cash in bank deposit accounts may at times exceed federally insured limits. At December 31, 2023, 2022, and 2021, S0, S25,766, and S0, respectively, in bank deposit accounts exceeded the federally insured limit. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash.
Revenue Recognition
The Company recognizes revenue following Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, "Revenue from Contracts with Customers (Topic 606)". Topic 606 requires that an entity recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for goods or services. The guidance requires an entity to follow a five-step model to (a) identify the contract(s) with a customer, (b) identify the performance obligations in the contract, (c) determine the transaction price, and (e) recognize revenue when the entity satisfies a performance obligation.
Revenue from sales of an individual franchise is recognized as performance obligations are satisfied. The portion of the franchise fee that is not attributed to a distinct performance obligation is amortized over the life of the related franchise or area representative agreement for each area.
The Company executes franchise agreements for each franchise which set out the terms of the agreement with the franchisee. Franchise agreements typically require the franchisee to pay an initial, non-refundable fee and continuing fees based upon a percentage of sales.
Source: Item 23 — RECEIPT (FDD pages 63–234)
What This Means (2024 FDD)
According to Deka Lash's 2024 Franchise Disclosure Document, the company recognizes revenue from franchise sales as performance obligations are satisfied. The portion of the initial franchise fee not directly tied to a specific performance obligation is amortized over the life of the franchise agreement.
Deka Lash considers the services provided for the initial franchise fees as highly interrelated with the franchise rights and not individually distinct from the ongoing services they provide to franchisees. As a result, the initial franchise fees are recognized as revenue over the term of each respective franchise agreement.
Specifically, Deka Lash recognizes these initial franchise fees on a straight-line basis, aligning with the franchisee's right to use and benefit from the company's intellectual property. As of December 31, 2023, deferred franchise fees totaled $6,400,116, with current maturities (the portion expected to be recognized within the next year) being $1,159,901, leaving a balance of $5,240,215.