When are the related services considered rendered by Fly To Fit?
Fly_To_Fit Franchise · 2024 FDDAnswer from 2024 FDD Document
ents with maturities of three months or less when purchased.
Revenue Recognition
Revenues are primarily derived from franchise fees (one-time and recurring monthly fees). In accordance with Accounting Standards Codification (ASC) Topic 606, Revenue will be recognized when persuasive evidence of an arrangement exists, delivery has occurred, or services have been rendered, the seller's price to the buyer is fixed or determinable, and collectability is reasonable assured. The determination of whether fees and fixed or determinable and collection is reasonable assured involves the use of assumptions. Arrangement terms and customer information 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.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 44)
What This Means (2024 FDD)
According to Fly To Fit's 2024 Franchise Disclosure Document, revenue recognition occurs when several conditions are met. These conditions include persuasive evidence of an arrangement, delivery of goods or rendering of services, a fixed or determinable seller's price, and reasonable assurance of collectability. The determination of whether fees are fixed or determinable and whether collection is reasonably assured involves the use of assumptions. Arrangement terms and customer information are evaluated to ensure these criteria are met before revenue recognition.
Fly To Fit estimates the stand-alone selling price of pre-opening activities using an adjusted market assessment approach. The company allocates 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 allocated to the right to access Fly To Fit's intellectual property. Consideration allocated to pre-opening activities that are not brand specific is 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 is recorded as Unearned Revenue and will be recognized over the term of the franchise agreement.
For a prospective Fly To Fit franchisee, this means that the initial franchise fee covers various elements, including training and access to intellectual property. The portion of the fee related to non-brand-specific training is recognized as revenue by Fly To Fit as the training services are provided. The remaining portion, primarily for the franchise rights, is recognized over the life of the franchise agreement. This accounting approach affects Fly To Fit's reported financial performance and could influence a franchisee's assessment of the company's profitability and financial stability.