What is the relationship between the initial franchise fee and the unearned revenue for a Desi District franchise?
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 initial franchise fee is related to unearned revenue through a revenue recognition process. Desi District allocates the initial franchise fees and any fixed consideration under the franchise agreement to the standalone selling price of training services that are not brand specific. Any remaining amount is allocated to the right to access Desi District's intellectual property.
The portion of the initial franchise fee allocated to pre-opening activities that are not brand specific is recognized as revenue ratably as those services are rendered to the franchisee. This means that Desi District recognizes this portion of the revenue over the period in which they provide these services.
The remaining portion of the initial franchise fee, which is not allocated to these pre-opening activities, is recorded as "Unearned Revenue." This unearned revenue is then recognized over the term of the franchise agreement. This indicates that Desi District recognizes this revenue gradually over the life of the franchise agreement, reflecting the ongoing value provided to the franchisee through access to the brand's intellectual property and continued support.