What accounting principles must Desi District's financial statements adhere to?
Desi_District Franchise · 2024 FDDAnswer from 2024 FDD Document
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NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("US GAAP"). As a result, the Company records revenue when earned and expenses when incurred. The Company has adopted the calendar year as its basis of reporting.
Use of Estimates
The preparation of financial statements, in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and the disclosures of contingent assets and liabilities and other items, as well as the reported revenues and expenses. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and any cash equivalents include all cash balances, and highly liquid investments with 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 52)
What This Means (2024 FDD)
According to Desi District's 2024 Franchise Disclosure Document, the company's financial statements are prepared in accordance with accounting principles generally accepted in the United States of America ("US GAAP"). This means Desi District recognizes revenue when earned and expenses when incurred, and the company has adopted the calendar year as its basis of reporting. The financials included in the FDD have been audited by an independent accountant, Omar Alnuaimi, CPA.
US GAAP requires Desi District's management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent items, and reported revenues and expenses. Actual results could differ from these estimates. The company's accounting policies also cover how it handles cash and cash equivalents, defining them as including all cash balances and highly liquid investments with maturities of three months or less when purchased.
For revenue recognition, Desi District primarily derives revenue from franchise fees, both one-time and recurring monthly fees. The company follows Accounting Standards Codification (ASC) Topic 606, which dictates that revenue is recognized when there is persuasive evidence of an arrangement, delivery has occurred or services have been rendered, the price is fixed or determinable, and collectability is reasonably assured. The company also elected to adopt the new standard issued by The Financial Accounting Standards Board (FASB) 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.
Prospective franchisees should understand that these accounting principles and standards ensure a level of consistency and comparability in Desi District's financial reporting. This allows potential investors and franchisees to assess the company's financial health and performance with a degree of confidence. However, it's important to remember that the use of estimates and assumptions means that the financial statements are not an exact representation of the company's financial position, and actual results may vary.