What is the significance of pre-opening activities being 'highly interrelated' to Desi District's intellectual property?
Desi_District Franchise · 2024 FDDAnswer from 2024 FDD Document
The Company's primarily performance obligation under the franchise agreement mainly includes granting certain rights to access the Company's intellectual property and a variety of activities relating to opening a franchise unit, including initial training and other such activities commonly referred to collectively as "pre-opening activities", which are recognized as a single performance obligation. 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. The portion of pre-opening activities that will be provided that is not brand specific is expected to be distinct as it will provide a benefit to the franchisee and is expected not to be highly interrelated or interdependent to the access of the Company's intellectual property, and therefore will be accounted for as a separate distinct performance obligation. All other pre-opening activities are expected to be highly interrelated and interdependent to the access of the Company's intellectual property and therefore will be accounted for as a single performance obligation, which is satisfied by granting certain rights to access the Company's intellectual property over the term of each 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 degree to which pre-opening activities are related to the company's intellectual property affects how revenue from franchise fees is recognized. Desi District distinguishes between pre-opening activities that are brand-specific and those that are more general business training.
Specifically, Desi District recognizes revenue from pre-opening activities that are not brand-specific separately from the franchise license. These activities provide general business information that benefits the franchisee and are not highly interrelated with Desi District's intellectual property. The revenue from these activities is recognized as the services are rendered.
However, pre-opening activities that are highly interrelated and interdependent with access to Desi District's intellectual property are treated differently. Desi District considers these activities part of a single performance obligation, which is satisfied over the term of the franchise agreement as the franchisee gains access to the company's intellectual property. This means that the revenue associated with these activities is recognized over the life of the franchise agreement, rather than immediately upon completion of the pre-opening activities. This accounting treatment reflects the view that these activities are integral to the franchisee's ability to utilize Desi District's brand and operating system.