What is Extreme Art Studio's policy regarding loss contingencies that are considered 'remote'?
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 considered "remote" is that they are neither accounted for nor disclosed in their financial statements. This policy is based on the guidance in ASC 450, Contingencies, which dictates how loss contingencies are handled based on their likelihood of occurrence.
For a prospective Extreme Art Studio franchisee, this means that if there are potential losses that the company deems unlikely to occur, these will not be listed as liabilities or potential risks in the financial statements. This approach is standard accounting practice, as it prevents the financial statements from being cluttered with speculative or highly improbable scenarios.
However, it's important to note that management believes any unfavorable outcomes would not materially affect the company's financial position. Franchisees should be aware of this policy and, if concerned about potential risks, may want to inquire further about the types of contingencies the company considers "remote" and how they arrived at that assessment.