Does Fly To Fit consider pre-opening activities as a single performance obligation?
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's primary performance obligation under the franchise agreement includes granting rights to access their intellectual property and various pre-opening activities like initial training. Fly To Fit recognizes these pre-opening activities as a single performance obligation. However, certain pre-opening activities that are not brand specific and provide general business information are treated as a separate performance obligation. These 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.
Fly To Fit estimates the stand-alone selling price of 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 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 pre-opening activities that are not brand specific is recognized ratably as those services are rendered. The remaining franchisee fee not allocated to pre-opening activities is recorded as Unearned Revenue and will be recognized over the term of the franchise agreement.
For a prospective franchisee, this means that the initial franchise fee covers both the right to use Fly To Fit's brand and system, as well as the initial training and support needed to get the business up and running. However, a portion of the pre-opening activities that are not specific to the Fly To Fit brand will be accounted for separately and recognized as revenue when those services are provided. The remaining portion of the franchise fee, which is associated with the brand and ongoing support, will be recognized over the life of the franchise agreement. This accounting treatment can affect how Fly To Fit reports its revenue and may have implications for the franchisee's understanding of the value they receive upfront versus over time.