What accounting standards update (ASU) is referenced in relation to Desi District's revenue recognition?
Desi_District Franchise · 2024 FDDAnswer from 2024 FDD Document
The Company estimates the stand-alone selling price of pre-opening activities using an adjusted market assessment approach. The Company will first allocate the initial franchise fees and the fixed consideration, under the franchise agreement to the standalone selling price of the training services that are not brand specific and the residual, if any, to the right to access the Company's intellectual property. Consideration allocated to pre-opening activities, which are not brand specific are recognized ratably as those services are rendered. 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 not allocated to pre-opening activities are recorded as Unearned Revenue and will be recognized over the term of the franchise agreement.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 52)
What This Means (2024 FDD)
According to Desi District's 2024 Franchise Disclosure Document, the company references Accounting Standards Update (ASU) to ASC 606, Franchisors—'Revenue from Contracts with Customers (Subtopic 952-606): Practical Expedient'. This update, issued by the Financial Accounting Standards Board (FASB) in 2022, provides a practical way for private company franchisors to account for pre-opening services provided to a franchisee. Desi District has elected to adopt this new standard.
This ASU allows Desi District to treat pre-opening services as distinct from the franchise license under specific conditions. This means that if the pre-opening services are consistent with a predefined list within the guidance, they can be accounted for separately. Desi District expects that certain pre-opening activities provided to the franchisee will not be brand specific and will provide the franchisee with relevant general business information that is separate and distinct from the operation of a company-branded franchise unit.
The portion of pre-opening activities that will be provided that is not brand specific is expected to be distinct as it will provide a benefit to the franchisee and is expected not to be highly interrelated or interdependent to the access of the Company's intellectual property, and therefore will be accounted for as a separate distinct performance obligation. All other pre-opening activities are expected to be highly interrelated and interdependent to the access of the Company's intellectual property and therefore will be accounted for as a single performance obligation, which is satisfied by granting certain rights to access the Company's intellectual property over the term of each franchise agreement. The company estimates the stand-alone selling price of pre-opening activities using an adjusted market assessment approach.
For a prospective franchisee, this accounting treatment means that the initial franchise fees and fixed consideration will be allocated to the standalone selling price of training services that are not brand specific, with any residual amount allocated to the right to access Desi District's intellectual property. The consideration allocated to these non-brand-specific pre-opening activities will be recognized ratably as the services are rendered. The remaining franchisee fee not allocated to pre-opening activities are recorded as Unearned Revenue and will be recognized over the term of the franchise agreement.