Has Fly To Fit elected to adopt the new accounting standard provided by the ASU?
Fly_To_Fit Franchise · 2024 FDDAnswer from 2024 FDD Document
are evaluated to ensure that these criteria are met prior to recognition of revenue.
Specifically for franchisors, The Financial Accounting Standards Board (FASB) has issued an Accounting Standards Update (ASU) to ASC 606, Franchisors—'Revenue from Contracts with Customers (Subtopic 952-606): Practical Expedient' in 2022 which provides a new practical expedient that permits private company franchisors to account for preopening services provided to a franchisee as distinct from the franchise license if the services are consistent with those included in a predefined list within the guidance. The Company has elected to adopt this new standard.
FLY TO FIT FRANCHISE, LLC NOTES TO FINANCIAL STATEMENTS APRIL 15, 2024
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
Unearned Revenue
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.
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 has elected to adopt the new accounting standard issued by the Financial Accounting Standards Board (FASB). This standard is an Accounting Standards Update (ASU) to ASC 606, specifically addressing franchisors' revenue from contracts with customers. It introduces a practical expedient that allows private company franchisors to account for pre-opening services provided to a franchisee as distinct from the franchise license, provided these services align with a predefined list within the guidance.
For a prospective Fly To Fit franchisee, this accounting election by the company means that the financial reporting may present pre-opening activities separately from the franchise license itself, if those activities meet specific criteria. This could provide more transparency into the revenue recognition related to these distinct services. The FDD notes that Fly To Fit expects 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. This distinction is important for understanding how Fly To Fit recognizes revenue and how the initial franchise fees are allocated between different services and rights provided to the franchisee.
It is important for potential franchisees to understand how these accounting standards affect the presentation of Fly To Fit's financial statements, as it can influence the perceived value and cost of the franchise. Franchisees should review the financial statements and related notes carefully, and consult with a financial advisor to fully understand the implications of this accounting election.