What is the practical expedient mentioned in the context of Desi District's revenue recognition?

According to Desi District's 2024 Franchise Disclosure Document, the practical expedient relates to accounting for preopening services. Specifically, in 2022, the Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU) to ASC 606, Franchisors—'Revenue from Contracts with Customers (Subtopic 952-606): Practical Expedient'. This update allows private company franchisors to account for preopening services provided to a franchisee as distinct from the franchise license itself, provided these services align with a predefined list within the guidance. Desi District has elected to adopt this new standard.

For a Desi District franchisee, this means that the franchisor can separate the revenue recognition for the initial franchise fee into different components: the franchise license and the pre-opening services. The pre-opening activities include initial training and other activities related to opening a franchise unit. Desi District considers these pre-opening activities as a single performance obligation. However, the company 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.

Desi District will allocate the initial franchise fees and fixed consideration under the franchise agreement to the stand-alone selling price of the 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 pre-opening activities that are not brand-specific is recognized as revenue ratably as those services are 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 accounting treatment could affect the timing of revenue recognition for Desi District, potentially impacting the financial statements presented to prospective franchisees.