What accounting standard update (ASU) regarding financial instruments - credit losses (Topic 326) was issued by the FASB that affects Exit's accounting?
Exit Franchise · 2025 FDDAnswer from 2025 FDD Document
On January 1, 2023, the Company adopted FASB ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and all related subsequent amendments thereto. This ASU replaced the incurred loss method of measuring financial assets with an expected loss method, which is referred to as the current expected credit loss (CECL) method. CECL requires an estimate of credit losses over the life of the financial asset using historical experience, current conditions, and reasonable and supportable forecasts. For the Company, the ASU applies to the measurement of its accounts receivable. Accounts receivable are now presented by using an allowance for credit losses to reduce the receivables balances to the net amount expected to be collected over the lives of the receivables. The Company adopted the new standard using the modified retrospective approach. For the Company, there was no transition adjustment related to the adoption of CECL.
Source: Item 23 — RECEIPT (FDD pages 42–235)
What This Means (2025 FDD)
According to Exit's 2025 Franchise Disclosure Document, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-13, also known as Financial Instruments - Credit Losses (Topic 326), which impacts Exit's accounting practices. This update introduces an impairment model for most financial instruments that is based on expected losses rather than incurred losses. This means that Exit needs to estimate potential credit losses over the contractual life of their financial instruments and record this as an allowance to offset the amortized cost basis. This approach results in a net presentation of the amount expected to be collected on the financial instrument. Exit adopted this standard on January 1, 2023, using a modified retrospective approach.
For a prospective Exit franchisee, this accounting change primarily affects how Exit manages and reports its accounts receivable. The ASU requires Exit to use an allowance for credit losses to reduce the receivables balances to the net amount expected to be collected over the lives of the receivables. This involves estimating credit losses over the life of the financial asset, considering historical experience, current conditions, and reasonable forecasts. The FDD states that there was no transition adjustment related to the adoption of CECL, meaning the initial impact was not significant for Exit.
This accounting standard update aims to provide a more forward-looking and comprehensive assessment of credit losses, which can help Exit better manage its financial risks related to receivables. While the FDD indicates that the initial adoption did not have a material impact, franchisees should be aware that ongoing assessments and adjustments to the allowance for credit losses could affect Exit's reported financial performance. Understanding these accounting policies can help franchisees better interpret Exit's financial statements and assess the overall financial health of the company.