What is the significance of pre-opening activities being 'not brand specific' for Desi District?
Desi_District Franchise · 2024 FDDAnswer from 2024 FDD Document
hts to access the Company's intellectual property over the term of each franchise agreement.
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.
Income Taxes
The Company, with the consent of its shareholders, has elected to be an S-Corporation (for tax purposes). In lieu of corporate income taxes, the shareholder(s) of an S-Corporation is taxed based on its proportionate share of The Company's taxable income. Therefore, no provision or liability for income taxes has been included in these financial statements.
Commitments and Contingencies
The Company may be subject to pending legal proceedings and regulatory actions in the ordinary course of business. The results of such proceedings cannot be predicted with certainty, but the Company does not anticipate that the final outcome, if any, arising out of any such matter will have a material adverse effect on its business, financial condition or results of operations. As of June 15, 2024, the Company has not reported any lawsuit or known plans of litigation by or against the Company.
DESI DISTRICT FRANCHISE GROUP, LLC NOTES TO FINANCIAL STATEMENTS JUNE 15, 2024
NOTE C - CONCENTRATIONS OF RISK
Financial instruments that potentially subject the Company to credit risk consist of cash and cash equivalents. The Company places its cash and any cash equivalents with a limited number of high-quality financial institutions and do not exceed the amount of insurance provided on such deposits.
NOTE D - SUBSEQUENT EVENTS
Management has evaluated subsequent events through June 16, 2024, the date on which the financial statements were available to be issued. Management has determined that none of the events occurring after the date of the balance sheet through the date of Management's review substantially affect the amounts and disclosure of the accompanying financial statements.
924 W.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 52)
What This Means (2024 FDD)
According to Desi District's 2024 Franchise Disclosure Document, the distinction between brand-specific and non-brand-specific pre-opening activities has significant accounting implications. Desi District allocates the initial franchise fees and fixed consideration to training services that are not brand specific. These non-brand-specific activities are recognized ratably as services are rendered. This means that Desi District recognizes revenue from these activities as they provide the services to the franchisee.
This accounting treatment is influenced by Financial Accounting Standards Board (FASB) guidance, specifically ASU to ASC 606. This update allows franchisors to account for pre-opening services separately from the franchise license if those services align with a predefined list. Desi District has chosen to adopt this standard, which impacts how they recognize revenue related to pre-opening activities.
For a prospective Desi District franchisee, this means that a portion of the initial franchise fee covers general business information and training that is separate from the specific operation of a Desi District franchise. Because these activities are 'not brand specific', Desi District can recognize the revenue associated with these services as they are delivered, rather than deferring it over the entire term of the franchise agreement. The remaining portion of the franchisee fee, which is related to the brand-specific aspects of opening the franchise, is recorded as unearned revenue and recognized over the term of the franchise agreement.