What does the practical expedient allow Extreme Art Studio to account for regarding pre-opening services?
Extreme_Art_Studio Franchise · 2024 FDDAnswer from 2024 FDD Document
ng sales occur. Product sales are recognized upon shipment. In allocating the transaction price and recognizing the revenue associated with initial franchise fees, the Company has elected to adopt the practical expedient for private company franchisors outlined in ASC 952-606, Franchisors—Revenue from Contracts with Customers. The practical expedient allows franchisors to account for pre-opening services as a single distinct performance obligation. These pre-opening services include the following:
- Assistance in the selection of a site
NOTES TO THE FINANCIAL STATEMENTS December 31, 2023
- Assistance in obtaining facilities and preparing the facilities for their intended use, including related financing, architectural, and engineering services, and lease negotiation
- Training of the franchisee's personnel or the franchisee
- Preparation and distribution of manuals and similar material concerning operations, administration, and record keeping
- Bookkeeping, information technology, and advisory services, including setting up the franchisee's records and advising the franchisee about income, real estate, and other taxes about local regulations affecting the franchisee's business
- Inspection, testing, and other quality control programs
As of December 31, 2023, the Company has not collected initial franchise fees and has not determined the
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 has elected to adopt a practical expedient for private company franchisors as outlined in ASC 952-606, Franchisors—Revenue from Contracts with Customers. This allows Extreme Art Studio to account for pre-opening services as a single distinct performance obligation.
The pre-opening services covered by this practical expedient include assistance in site selection, help with obtaining and preparing facilities (including financing, architectural, engineering services, and lease negotiation), training of the franchisee's personnel or the franchisee themselves, preparation and distribution of manuals and similar materials concerning operations, administration, and record keeping. It also encompasses bookkeeping, IT, and advisory services, such as setting up the franchisee's records and advising on income, real estate, and other taxes, as well as local regulations affecting the franchisee's business, and inspection, testing, and other quality control programs.
As of December 31, 2023, Extreme Art Studio had not yet collected initial franchise fees and had not determined the amount to be allocated to these pre-opening services. This accounting method simplifies the revenue recognition process for Extreme Art Studio, as it can treat all these services as one combined obligation rather than separate items. For a prospective franchisee, this means that the initial franchise fee covers a broad range of support services provided before the studio opens, which are accounted for collectively by the franchisor.