How does Fly To Fit account for pre-opening activities that are not brand specific?
Fly_To_Fit Franchise · 2024 FDDAnswer from 2024 FDD Document
The Company expects that certain pre-opening activities provided to the franchisee will not be brand specific and will provide the franchisee with relevant general business information that is separate and distinct from the operation of a company-branded franchise unit. The portion of pre-opening activities that will be provided that is not brand specific is expected to be distinct as it will provide a benefit to the franchisee and is expected not to be highly interrelated or interdependent to the access of the Company's intellectual property, and therefore will be accounted for as a separate distinct performance obligation. All other pre-opening activities are expected to be highly interrelated and interdependent to the access of the Company's intellectual property and therefore will be accounted for as a single performance obligation, which is satisfied by granting certain rights to access the Company's intellectual property over the term of each franchise agreement.
The Company estimates the stand-alone selling price of pre-opening activities using an adjusted market assessment approach. The Company will first allocate the initial franchise fees and the fixed consideration, under the franchise agreement to the standalone selling price of the training services that are not brand specific and the residual, if any, to the right to access the Company's intellectual property. Consideration allocated to pre-opening activities, which are not brand specific are recognized ratably as those services are rendered. Consideration allocated to pre-opening activities included under Accounting Standards Update (ASU) to ASC 606, Franchisors—'Revenue from Contracts with Customers (Subtopic 952-606): Practical Expedient' is recognized when the related services have been rendered.
The remaining franchisee fee not allocated to pre-opening activities are recorded as Unearned Revenue and will be recognized over the term of the franchise agreement.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 44)
What This Means (2024 FDD)
According to Fly To Fit's 2024 Franchise Disclosure Document, the company distinguishes between pre-opening activities that are brand-specific and those that are not. Fly To Fit recognizes that some pre-opening activities provide franchisees with general business information that is separate from the operation of a Fly To Fit branded franchise. These non-brand-specific activities are considered distinct because they benefit the franchisee and are not highly interrelated or interdependent with access to Fly To Fit's intellectual property. As such, Fly To Fit accounts for these activities as a separate performance obligation.
Fly To Fit estimates the stand-alone selling price of these non-brand-specific pre-opening activities using an adjusted market assessment approach. The company allocates the initial franchise fees and fixed consideration under the franchise agreement to the stand-alone selling price of the training services that are not brand specific. Any residual amount is then allocated to the right to access Fly To Fit's intellectual property. The consideration allocated to these non-brand-specific pre-opening activities is recognized ratably as the services are rendered. This means that Fly To Fit recognizes the revenue from these services over the period in which they are provided to the franchisee.
The remaining franchisee fee, which is not allocated to the non-brand-specific pre-opening activities, is recorded as Unearned Revenue. This unearned revenue is then recognized over the term of the franchise agreement. This accounting treatment ensures that Fly To Fit recognizes revenue in a manner that reflects the transfer of goods or services to the franchisee. This approach is consistent with accounting standards for franchisors, particularly Accounting Standards Update (ASU) to ASC 606, which provides guidance on revenue recognition from contracts with customers.