How does Deka Lash recognize revenue from 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.
The Company has determined that the services provided in exchange for these initial franchise fees are highly interrelated with the franchise right and are not individually distinct from the ongoing ser
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 attributed to a distinct performance obligation is amortized over the life of the franchise agreement.
Specifically, Deka Lash recognizes initial franchise fees as revenue over the term of each respective franchise agreement, using a straight-line basis. This approach aligns with the franchisee's right to use and benefit from Deka Lash's intellectual property throughout the franchise term. As of December 31, 2023, Deka Lash had $6,400,116 in deferred franchise fees, with $1,159,901 classified as current maturities, resulting in $5,240,215 in deferred franchise fees.
For a prospective franchisee, this means that Deka Lash does not recognize the entire initial franchise fee as revenue immediately upon payment. Instead, it spreads the recognition of this revenue over the duration of the franchise agreement. This accounting practice reflects the ongoing support and brand usage provided to the franchisee by Deka Lash. The deferred revenue balance indicates the amount of initial franchise fees that Deka Lash has collected but not yet recognized as earned revenue, which will be recognized over time as the franchise agreement continues.
This revenue recognition method is common in the franchise industry, as it reflects the ongoing nature of the franchisor-franchisee relationship and the continuous provision of services and brand support. Franchisees should be aware that the initial franchise fee contributes to the franchisor's long-term revenue stream and is tied to the continued operation and support of the franchise system.