How does Fly To Fit account for pre-opening activities that are highly interrelated and interdependent to the access of the Company's intellectual property?
Fly_To_Fit Franchise · 2024 FDDAnswer from 2024 FDD Document
The Company's primarily performance obligation under the franchise agreement mainly includes granting certain rights to access the Company's intellectual property and a variety of activities relating to opening a franchise unit, including initial training and other such activities commonly referred to collectively as "pre-opening activities", which are recognized as a single performance obligation. 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 when accounting for revenue. The FDD states that Fly To Fit recognizes that certain pre-opening activities given to franchisees will not be brand specific and will provide franchisees with general business information separate and distinct from the operation of a Fly To Fit-branded franchise unit.
For pre-opening activities that are not brand-specific, Fly To Fit accounts for them as a separate, distinct performance obligation because they are not highly interrelated or interdependent with access to 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. Fly To Fit 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.
In contrast, all other pre-opening activities that are highly interrelated and interdependent with access to Fly To Fit's intellectual property are accounted for as a single performance obligation. This obligation is satisfied by granting certain rights to access the company's intellectual property over the term of each franchise agreement. 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.