When does Desi District recognize consideration allocated to pre-opening activities that are not brand specific?
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.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 52)
What This Means (2024 FDD)
According to Desi District's 2024 Franchise Disclosure Document, the company recognizes consideration allocated to pre-opening activities that are not brand specific ratably as those services are rendered. This means that Desi District does not recognize the entire revenue from these activities upfront. Instead, they spread the recognition of revenue over the period in which they provide these services to the franchisee.
This approach aligns with accounting standards that require revenue to be recognized when it is earned. In the context of franchise pre-opening activities, this means that Desi District recognizes revenue as they deliver training and other services that are not specific to the Desi District brand. This could include general business training or support that would be valuable to any business owner, regardless of the specific franchise they operate.
For a prospective Desi District franchisee, this accounting practice may not have an immediate direct impact on their day-to-day operations. However, it provides insight into how Desi District manages its finances and ensures compliance with accounting standards. Understanding these practices can help franchisees assess the financial stability and transparency of the franchisor, which is a crucial aspect of evaluating a franchise opportunity.