What specific criteria must be met before Desi District can recognize revenue from franchise fees?
Desi_District Franchise · 2024 FDDAnswer from 2024 FDD Document
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.
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 revenue from franchise fees based on specific accounting principles. Desi District follows Accounting Standards Codification (ASC) Topic 606, which dictates that revenue is recognized when several conditions are met. These conditions ensure that revenue is only recorded when it is appropriately earned and reasonably assured.
Specifically, Desi District must have persuasive evidence that an arrangement exists, meaning there is a valid agreement in place. Delivery must have occurred, or the services must have been rendered to the franchisee. The price that the franchisee will pay must be fixed or determinable, meaning the amount is clearly defined and not subject to significant variation. Finally, collectability must be reasonably assured, indicating that Desi District is confident it will receive payment from the franchisee.
Before recognizing revenue, Desi District evaluates the arrangement terms and customer information to ensure all these criteria are satisfied. This involves making assumptions about the fees and the likelihood of collection. For pre-opening activities that are not brand-specific, revenue is recognized ratably as these services are provided. The remaining portion of the franchisee fee, not allocated to pre-opening activities, is recorded as Unearned Revenue and is recognized over the term of the franchise agreement. This approach ensures that Desi District adheres to accounting standards and accurately reflects its financial performance.