What is the practical expedient that Face Foundrie uses for private company franchisors?
Face_Foundrie Franchise · 2025 FDDAnswer from 2025 FDD Document
The Company is required to allocate the transaction price associated with initial franchise fees between the franchise license and associated performance obligations. In identifying the associated performance obligations, the Company has elected to adopt the practical expedient for private company franchisors outlined in ASC 952-606, Franchisors—Revenue from Contracts with Customers. In addition, the practical expedient allows franchisors to account for pre-opening services as a single distinct performance obligation, which the Company has elected to adopt. These pre-opening services include the following services (which the Company may or may not provide all of):
- Assistance in the selection of a site
- 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
NOTES TO THE FINANCIAL STATEMENTS December 31, 2024, 2023 and 2022
Prior to 2023, the Company allocated the franchise between the pre-opening services obligation and the franchise license (recognizing the amount allocated to the license over the life of the underlying agreement). Effective for the year ended December 31, 2023, the Company has determined that the fair value of pre-opening services exceeds the initial fees received; as such, the initial fees are allocated to the pre-opening services, which are recognized as revenue when those pre-opening services have been completed (generally upon commencement of operations).
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 73)
What This Means (2025 FDD)
According to Face Foundrie's 2025 Franchise Disclosure Document, the company has elected to adopt the practical expedient for private company franchisors outlined in ASC 952-606, Franchisors—Revenue from Contracts with Customers. This allows Face Foundrie to account for pre-opening services as a single distinct performance obligation. These pre-opening services include assistance in site selection, help in obtaining and preparing facilities (including financing, architectural, and engineering services, and lease negotiation), training of personnel or the franchisee, preparation and distribution of manuals, bookkeeping, IT, advisory services, and inspections and quality control programs.
Prior to 2023, Face Foundrie allocated the initial franchise fee between the pre-opening services obligation and the franchise license, recognizing the amount allocated to the license over the life of the underlying agreement. However, effective for the year ended December 31, 2023, Face Foundrie determined that the fair value of pre-opening services exceeded the initial fees received. As a result, the initial fees are now allocated to the pre-opening services, which are recognized as revenue when those pre-opening services have been completed, generally upon commencement of operations.
For a prospective Face Foundrie franchisee, this accounting method means that Face Foundrie recognizes the initial franchise fee as revenue only after it has provided the pre-opening services outlined in the franchise agreement. This could align Face Foundrie's financial interests with the franchisee's success in opening the location. It also affects how Face Foundrie reports its financial performance, as initial franchise fees are recognized at a different time than they were before 2023.