What approach does Desi District use to estimate the stand-alone selling price of pre-opening activities?
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 estimates the stand-alone selling price of pre-opening activities using an adjusted market assessment approach. Desi District first allocates the initial franchise fees and fixed consideration under the franchise agreement to the stand-alone selling price of training services that are not brand specific. The residual amount, if any, is then allocated to the right to access Desi District's intellectual property.
Consideration allocated to pre-opening activities that are not brand specific is recognized ratably as those services are rendered. For pre-opening activities included under Accounting Standards Update (ASU) to ASC 606, Franchisors—'Revenue from Contracts with Customers (Subtopic 952-606): Practical Expedient', consideration is recognized when the related services have been rendered. The remaining franchisee fee not allocated to pre-opening activities is recorded as Unearned Revenue and will be recognized over the term of the franchise agreement.
This means that Desi District aims to determine the fair market value of each component of the initial franchise package, separating out the value of training, access to intellectual property, and other pre-opening services. This approach is important for revenue recognition purposes, ensuring that Desi District accurately reports its income as it provides services and grants access to its brand and systems. For a prospective franchisee, this accounting method may not have an immediate impact on day-to-day operations, but it provides transparency into how the franchisor values and accounts for the various elements of the franchise offering.