When preparing Desi District's financial statements, what items require management to make estimates and assumptions?
Desi_District Franchise · 2024 FDDAnswer from 2024 FDD Document
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 preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosures of contingent assets and liabilities, and the reported revenues and expenses. Actual results could differ from those estimates. This is a standard accounting practice, as many financial figures are not precisely determinable and require some level of judgment. These estimates are used when determining the collectability of revenues and whether fees are fixed or determinable.
Specifically, Desi District recognizes revenue from franchise fees (both one-time and recurring monthly fees). The determination of whether fees are fixed or determinable and whether collection is reasonably assured involves the use of assumptions. This means that Desi District must make informed judgments about the likelihood of receiving payments from franchisees based on arrangement terms and customer information.
Furthermore, Desi District estimates the stand-alone selling price of pre-opening activities using an adjusted market assessment approach. The company allocates initial franchise fees and fixed consideration under the franchise agreement to the stand-alone selling price of training services that are not brand specific, with any residual amount allocated to the right to access the company's intellectual property. The consideration allocated to pre-opening activities is recognized ratably as those services are rendered. This allocation and recognition process requires management to make estimates about the value and timing of these services.