How does Fitstop recognize revenues under the accrual method of accounting?
Fitstop Franchise · 2024 FDDAnswer from 2024 FDD Document
Basis of Accounting-The accompanying financial statements have been prepared on an accrual basis of accounting in conformity with accounting principles generally accepted in the United States of America. Under the accrual method, revenues are recognized when earned and expenses are recognized when a liability is incurred, without regard to receipt or disbursement of funds.
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
In compliance with the Financial Accounting Standards Board ("FASB") for revenue recognition ("Topic 606"), the Company records its non-refundable franchise fees, net of amounts earned based on allowable direct services, as deferred revenues, to be recognized over the life of the franchise agreement. The nonrefundable franchise fees received but not yet earned as of December 31, 2023, and 2022 were $50,000 and $0 respectively.
Source: Item 23 — RECEIPTS (FDD pages 50–135)
What This Means (2024 FDD)
According to Fitstop's 2024 Franchise Disclosure Document, the company prepares its financial statements on an accrual basis, in accordance with accounting principles generally accepted in the United States of America. This means Fitstop recognizes revenues when they are earned and expenses when liabilities are incurred, regardless of when the cash is actually received or disbursed. This is a standard accounting practice that provides a more accurate picture of a company's financial performance over a period of time.
Fitstop follows Accounting Standards Board (FASB) guidelines, specifically ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). This standard dictates that the transaction price related to performance obligations is recognized as those obligations are fulfilled. If any portion of the franchise fee isn't directly tied to a specific performance obligation, it is amortized over the life of the franchise agreement. Similarly, commissions paid for franchises are also amortized over the life of the franchise agreement.
For Fitstop franchisees, this means that the initial franchise fees they pay are not immediately recognized as revenue by Fitstop. Instead, Fitstop defers the recognition of these non-refundable fees, net of amounts earned based on allowable direct services, and recognizes them over the term of the franchise agreement. As of December 31, 2023, the nonrefundable franchise fees received but not yet earned totaled $50,000, whereas the corresponding amount as of December 31, 2022 was $0. This accounting treatment impacts Fitstop's reported financial performance in the short term but aligns revenue recognition with the delivery of services and the ongoing franchise relationship.