What is the impact of ASU 2014-09 on Fly To Fit's revenue recognition?
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. 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 Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU) to ASC 606, specifically for franchisors. This update, titled 'Revenue from Contracts with Customers (Subtopic 952-606): Practical Expedient' was issued in 2022. It provides a practical way for private company franchisors to account for pre-opening services provided to a franchisee separately from the franchise license, provided these services align with a predefined list within the guidance. Fly To Fit has chosen to adopt this new standard.
Fly To Fit's primary performance obligation under the franchise agreement involves granting rights to access their intellectual property and conducting pre-opening activities like initial training. These pre-opening activities are generally recognized as a single performance obligation. However, Fly To Fit anticipates that some pre-opening activities will not be brand-specific, offering franchisees general business information distinct from operating a Fly To Fit franchise.
The portion of pre-opening activities that are not brand specific will be treated as a separate, distinct performance obligation because it benefits the franchisee and is not highly interrelated with access to Fly To Fit's intellectual property. Fly To Fit estimates the stand-alone selling price of these pre-opening activities using an adjusted market assessment approach. The initial franchise fees and fixed consideration under the franchise agreement are allocated to the stand-alone selling price of the training services that are not brand specific, with any remaining amount 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, while consideration allocated to pre-opening activities included under ASU to ASC 606 is recognized when the related services have been 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.