What new accounting standard, issued in May 2014, affected Fitstop's revenue recognition?
Fitstop Franchise · 2024 FDDAnswer from 2024 FDD Document
s could vary from those estimates.
Cash-Cash consists of unrestricted cash on deposit at financial institutions.
Taxes on Income -The Company is a limited liability company for tax purposes. Income for the Company passes directly through to its members and is reported on the members individual income tax returns.
Revenue Recognition — In May 2014, the FASB issued a new accounting standard ASU No. 2014- 09, "Revenue from Contracts with Customers (Topic 606)", that attempts to establish a uniform basis for recording revenue to virtually all industries' financial statements.
The new guidance changed how the Company records initial franchise fees from franchisees, area developer fees and brand development fees. Under Legacy GAAP, franchise fees, which are nonrefundable, were recognized as income when substantially all services to be performed by the Company and conditions relating to the sale of the franchise were performed or satisfied, which generally occurred when the franchisee commenced operations.
FITSTOP USA, INC. NOTES TO FINANCIAL STATEMENTS (continued)
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3. REVENUE RECOGNITION
The Company records revenue in accordance Accounting Standards Board ("FASB") and Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers (Topic 606). The transaction price attributable to performance obligations are recognized as the performance obligations are satisfied. The portion of the franchise fee, if any, that is not attributable to a distinct performance obligation are amortized over the life of the related franchise agreements. Commission paid for franchises are amortized over the life of the franchise agreement. The company adopted ASC-606 and ASU 2021-02 using the modified retrospective method starting with January 1, 2019
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Source: Item 23 — RECEIPTS (FDD pages 50–135)
What This Means (2024 FDD)
According to Fitstop's 2024 Franchise Disclosure Document, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, "Revenue from Contracts with Customers (Topic 606)" in May 2014. This new accounting standard aimed to create a consistent method for recording revenue across nearly all industries' financial statements.
This change directly impacted how Fitstop records initial franchise fees, area developer fees, and brand development fees. Previously, under Legacy GAAP, Fitstop recognized nonrefundable franchise fees as income when they had substantially performed all required services and met the conditions related to the franchise sale, typically when the franchisee commenced operations.
Now, Fitstop records revenue according to Topic 606. The transaction price related to performance obligations is recognized as those obligations are fulfilled. Any portion of the franchise fee not directly linked to a specific performance obligation is amortized over the life of the franchise agreement. Similarly, commissions paid for franchises are also amortized over the duration of the franchise agreement. Fitstop adopted ASC-606 and ASU 2021-02 using the modified retrospective method starting January 1, 2019.
In compliance with FASB's Topic 606, Fitstop records non-refundable franchise fees, minus any amounts earned based on direct services, as deferred revenues. These deferred revenues are then recognized over the life of the franchise agreement. As of December 31, 2023, the nonrefundable franchise fees received but not yet earned totaled $50,000, while the corresponding amount as of December 31, 2022, was $0.