What is the ASC subtopic number referenced in relation to Desi District's revenue recognition?
Desi_District Franchise · 2024 FDDAnswer from 2024 FDD Document
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 follows Accounting Standards Codification (ASC) Topic 606 for revenue recognition. Specifically, the document mentions Accounting Standards Update (ASU) to ASC 606, Franchisors—'Revenue from Contracts with Customers (Subtopic 952-606): Practical Expedient'.
This subtopic, 952-606, provides a practical approach for private company franchisors in accounting for pre-opening services. It allows Desi District to treat pre-opening services as distinct from the franchise license under certain conditions. These conditions include the services being consistent with a predefined list within the guidance.
Desi District has elected to adopt this new standard. This means that when evaluating a Desi District franchise, prospective franchisees should understand that the initial franchise fee covers both the right to use Desi District's intellectual property and the pre-opening activities. The portion of the fee allocated to pre-opening activities that are not brand specific is recognized as services are rendered. The remaining portion is recognized over the term of the franchise agreement.