When does Extreme Art Studio recognize revenue from product sales?
Extreme_Art_Studio Franchise · 2024 FDDAnswer from 2024 FDD Document
The Company's revenues consist of initial franchise fees, royalties and marketing fees based on a percentage of gross revenues, and product sales. Upon inception, the Company adopted ASC 606, Revenue from Contracts with Customers. ASC 606 provides that revenues are to be recognized when control of promised goods or services is transferred to a customer in an amount that reflects the considerations expected to be received for those goods or services. In implementing ASC 606, the Company evaluated all revenue sources using the five-step approach: identify the contract, identify the performance obligations, determine the transaction price, allocate the transaction price, and recognize revenue. For each franchised location, the Company enters into a formal franchise agreement that clearly outlines the transaction price, which includes an initial fee and ongoing fees, and the Company's performance obligations.
Upon evaluation of the five-step process, the Company has determined that royalties and marketing fees from locations operated by a franchisee, which are based on a percentage of gross revenue, are to be recognized at the time the underlying 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
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 recognizes revenue from product sales upon shipment. This means that Extreme Art Studio records the revenue in its financial statements at the point when the products are shipped to the customer, not when the order is placed, payment is received, or the customer actually receives the product. This revenue recognition policy is based on accounting standards ASC 606.
For a prospective Extreme Art Studio franchisee, this policy has implications for understanding the franchisor's financial performance. The franchisee can see when product sales are officially recorded as revenue. This is important for assessing the franchisor's financial health and growth trends.
It's also important to note that Extreme Art Studio recognizes royalties and marketing fees from franchisee-operated locations at the time the underlying sales occur. Initial franchise fees are handled differently, using a practical expedient for private company franchisors, outlined in ASC 952-606, which allows pre-opening services to be accounted for as a single distinct performance obligation.