To what specific financial asset does the FASB ASU 2016-13 standard apply for Exit?
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 FASB ASU 2016-13 standard, which concerns financial instruments and credit losses, specifically applies to the measurement of Exit's accounts receivable. This standard replaces the incurred loss method with an expected loss method, known as the current expected credit loss (CECL) method.
Under CECL, Exit is required to estimate credit losses over the life of its accounts receivable, considering historical experience, current conditions, and reasonable forecasts. As a result, Exit presents its accounts receivable with an allowance for credit losses, reducing the balances to the net amount expected to be collected. The company adopted this new standard using a modified retrospective approach, effective January 1, 2023.
For a prospective Exit franchisee, this accounting practice means that Exit is proactively accounting for potential losses from unpaid invoices. However, the FDD states that there was no transition adjustment related to the adoption of CECL, suggesting that the initial impact of this change on Exit's financial statements was minimal.