How does Engineering For Kids determine the allowance for credit losses?
Engineering_For_Kids Franchise · 2025 FDDAnswer from 2025 FDD Document
h and Cash Equivalents
The Company considers all investments with an original maturity of three months or less when purchased to be cash equivalents.
Accounts Receivable and Credit Losses
The Company is exposed to credit losses primarily through sales of services. Accounts receivable represent the Company's unconditional right to consideration in exchange for services that the Company has provided to the customer based on contracted prices. Accounts receivable are recorded when invoices are issued and are presented on the balance sheet at the amount management expects to collect. Management provides for probable uncollectible amounts through credit losses expense and an adjustment to the allowance for credit losses. The Company's expected loss allowance methodology for accounts receivable is developed using historical collection experience, current and future economic and market conditions, and a review of the current status of customers' accounts receivable. The beginning balance of accounts receivable was $17,369 at January 1, 2022. Due to the short-term nature of such receivables, the estimated accounts receivable that may not be collected is based on aging of the accounts receivable balances.
The Company evaluates contract terms and conditions, economic and industry risk, customer credit worthiness, and may require prepayment to mitigate risk of loss. Specific allowance amounts are established to record the appropriate provision for customers that have a higher probability of default. The Company monitors changes to the receivables balance on a timely basis, and balances are written off as they are determined to be uncollectable after all collection efforts have been exhausted. See Note 2 regarding concentrations of credit risk.
Management has determined the value of an allowance for credit losses is as follows:
| Balance, January 1 | $ | 19,950 | $ 12,997 | $ | 2,258 |
|---|---|---|---|---|---|
| Provision charges | 1,740 | 6,953 | 10,739 | ||
| Balance, December 31 | $ | 21,690 | $ 19,950 | $ | 12,997 |
Intangible Assets
Purchased intangible assets with a finite life are recorded at cost and amortized using the straight-line basis over their estimated useful life of the asset. Intangible assets with a finite life are tested for impairment when events or circumstances indicate that their carrying amount may not be recoverable. Research costs are expensed when incurred.
Source: Item 22 — CONTRACTS (FDD page 53)
What This Means (2025 FDD)
According to Engineering For Kids' 2025 Franchise Disclosure Document, the company determines the allowance for credit losses based on several factors. Management assesses probable uncollectible amounts through credit losses expense and an adjustment to the allowance for credit losses. The methodology considers historical collection experience, current and future economic and market conditions, and a review of the current status of customers’ accounts receivable. The beginning balance of accounts receivable was $17,369 at January 1, 2022. Due to the short-term nature of such receivables, the estimated accounts receivable that may not be collected is based on aging of the accounts receivable balances.
Engineering For Kids evaluates contract terms and conditions, economic and industry risk, and customer creditworthiness, and may require prepayment to mitigate the risk of loss. Specific allowance amounts are established to record the appropriate provision for customers that have a higher probability of default. The company monitors changes to the receivables balance on a timely basis, and balances are written off as they are determined to be uncollectible after all collection efforts have been exhausted.
In addition, Engineering For Kids recognizes an allowance for credit losses at the time a receivable is recorded based on management's estimate of expected credit losses, historical write-off experience, and current account knowledge, and adjusts this estimate over the life of the receivable as needed. The company evaluates the aggregation and risk characteristics of a receivable pool and develops loss rates that reflect historical collections, current forecasts of future economic conditions over the time horizon the company is exposed to credit risk, and payment terms or conditions that may materially affect future forecasts. The company performs ongoing credit evaluations of its customers' financial condition whenever deemed necessary. The company evaluates and maintains, if necessary, an allowance for credit losses based on the expected collectability of all accounts receivable, which takes into consideration an analysis of historical credit losses, specific customer creditworthiness and current economic trends.
For a prospective Engineering For Kids franchisee, this means that the franchisor actively manages and monitors credit risks associated with sales of services. Understanding the factors that influence the allowance for credit losses can provide insight into the financial health and risk management practices of Engineering For Kids. Franchisees should be aware that the franchisor's financial statements, and therefore potentially their own financial performance, can be affected by these estimates and assumptions.