How does Fly Fitness treat initial franchise fees received before a franchise opens?
Fly_Fitness Franchise · 2024 FDDAnswer from 2024 FDD Document
The Company follows Accounting Standards Update (ASU) 2021-02, whereby they have elected to account for preopening services as a single performance obligation. Once the Company performs its service requirements it records revenues and this is normally concurrent with a franchise opening. Franchise fees obtained prior to opening are recorded to deferred franchise fee revenue, a liability, and represent initial franchise fees received by the Company in advance of performing its performance obligation.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 44)
What This Means (2024 FDD)
According to Fly Fitness's 2024 Franchise Disclosure Document, the company adheres to Accounting Standards Update (ASU) 2021-02, and accounts for pre-opening services as a single performance obligation. Fly Fitness recognizes revenue once it fulfills its service requirements, typically when a franchise location opens.
Initial franchise fees received before a Fly Fitness location opens are recorded as deferred franchise fee revenue, which is classified as a liability on the company's balance sheet. This deferred revenue represents the initial franchise fees that Fly Fitness has received in advance of completing its performance obligations to the franchisee.
This accounting practice means that Fly Fitness does not recognize the initial franchise fee as earned revenue until it has provided the services and support necessary to help the franchisee open their studio. This approach is common in franchising, as it aligns revenue recognition with the delivery of services and reduces the risk of prematurely recognizing income before the franchisor has fulfilled its obligations.