How does Fly To Fit determine if pre-opening activities are highly interrelated or interdependent?
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.
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 to determine how revenue is recognized. Fly To Fit considers pre-opening activities that are not brand specific to be separate and distinct from the operation of a Fly To Fit franchise.
Specifically, Fly To Fit expects that certain pre-opening activities will provide franchisees with relevant general business information that is not brand-specific. These activities are considered distinct because they benefit the franchisee independently of the Fly To Fit intellectual property. As a result, Fly To Fit accounts for these non-brand-specific pre-opening activities as a separate performance obligation.
In contrast, all other pre-opening activities are considered highly interrelated and interdependent with access to Fly To Fit's intellectual property. These activities are therefore treated as a single performance obligation, which is satisfied by granting rights to access the company's intellectual property over the franchise agreement term. This means that revenue from these activities is recognized over the life of the franchise agreement, rather than immediately upon completion of the activities.