How does Deka Lash recognize revenue from the sale of an individual franchise?
Deka_Lash Franchise · 2024 FDDAnswer from 2024 FDD Document
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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 or area representative agreement.
For each franchise, Deka Lash executes a franchise agreement that outlines the terms, including the franchisee's obligation to pay an initial, non-refundable fee and ongoing fees based on a percentage of sales. Deka Lash has determined that the services provided for the initial franchise fees are closely linked to the franchise right and not distinct from the ongoing services provided to franchisees. Therefore, the initial franchise fees are recognized as revenue over the term of the 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 of $1,159,901, resulting in $5,240,215. This deferred revenue is expected to be recognized over the remaining terms of the associated franchise agreements.
For a prospective franchisee, this means that Deka Lash does not recognize the entire initial franchise fee as revenue immediately. Instead, it spreads the recognition of this revenue over the life of the franchise agreement, which is a common practice in franchising. This accounting method reflects the ongoing support and services Deka Lash provides to its franchisees throughout the term of the agreement.