What is the relationship between pre-opening activities and access to Fly To Fit's intellectual property?
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 considers pre-opening activities to be related to a franchisee's access to Fly To Fit's intellectual property. The FDD states that the company's primary performance obligation under the franchise agreement includes granting rights to access their intellectual property, as well as activities related to opening a franchise unit, including initial training, collectively known as "pre-opening activities." These are recognized as a single performance obligation.
However, Fly To Fit distinguishes between pre-opening activities that are brand-specific and those that are not. The company believes that certain pre-opening activities will not be brand specific and will provide franchisees with general business information separate from the operation of a Fly To Fit branded franchise. These non-brand-specific activities are considered distinct and not highly interrelated or interdependent with access to Fly To Fit's intellectual property. Therefore, they are accounted for as a separate performance obligation.
All other pre-opening activities are considered highly interrelated and interdependent with access to Fly To Fit's intellectual property. These activities are accounted for as a single performance obligation, which is fulfilled by granting rights to access Fly To Fit's intellectual property over the term of the franchise agreement. The company estimates the stand-alone selling price of pre-opening activities using an adjusted market assessment approach, allocating initial franchise fees and fixed consideration to training services that are not brand specific, with the residual allocated to the right to access the company's intellectual property. Consideration allocated to non-brand-specific pre-opening activities is recognized ratably as those services are rendered, while the remaining franchisee fee is recorded as unearned revenue and recognized over the term of the franchise agreement.