How is the 'Unearned Revenue' recognized by Desi District?
Desi_District Franchise · 2024 FDDAnswer from 2024 FDD Document
024
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
Unearned Revenue
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.
The Company estimates the stand-alone selling price of pre-opening activities using an adjusted market assessment approach.
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 unearned revenue over the term of the franchise agreement. The document specifies that the company's primary performance obligation under the franchise agreement includes granting rights to access their intellectual property. It also includes various pre-opening activities such as initial training. These pre-opening activities are collectively recognized as a single performance obligation.
Desi District distinguishes between pre-opening activities that are brand-specific and those that are not. The activities that are not brand specific provide franchisees with general business information that is separate and distinct from the operation of a Desi District franchise. These non-brand-specific activities are accounted for as a separate, distinct performance obligation because they benefit the franchisee and are not highly interrelated or interdependent with access to the company's intellectual property.
All other pre-opening activities that are highly interrelated and interdependent with access to Desi District's intellectual property are accounted for as a single performance obligation. This obligation is satisfied by granting certain rights to access the company's intellectual property over the term of each franchise agreement. The remaining franchisee fee not allocated to pre-opening activities is recorded as unearned revenue and is recognized over the term of the franchise agreement.