What is Extreme Art Studio's policy regarding disclosure of loss contingencies that are 'reasonably possible'?
Extreme_Art_Studio Franchise · 2024 FDDAnswer from 2024 FDD Document
and complaints arising in the ordinary course of business. In accounting for legal matters and other contingencies, the Company follows the guidance in ASC 450, Contingencies, under which loss contingencies are accounted for based upon the likelihood of incurrence of a liability. If a loss contingency is "probable" and the amount of loss can be reasonably estimated, it is accrued. If a loss contingency is "probable" but the amount of loss cannot be reasonably estimated, disclosure is made.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 49)
What This Means (2024 FDD)
According to Extreme Art Studio's 2024 Franchise Disclosure Document, the company's policy regarding loss contingencies considers the likelihood of incurring a liability. If a loss contingency is deemed 'reasonably possible,' Extreme Art Studio will disclose it. This disclosure includes the potential range of loss, if that range can be determined.
This means that if Extreme Art Studio faces potential legal claims or other issues where a loss is 'reasonably possible' but not 'probable,' they will inform potential franchisees about the situation. The disclosure aims to provide transparency about potential financial risks that the company might face. If the potential financial impact can be estimated, that will also be disclosed.
For a prospective Extreme Art Studio franchisee, this policy offers some reassurance that the company is transparent about risks. However, the FDD also states that if a loss contingency is 'remote,' it is neither accounted for nor disclosed. Franchisees should carefully consider the implications of any disclosed contingencies and how they might affect the overall financial health and stability of the franchise system.