What is the significance of ASC 606 for Fly To Fit's revenue recognition?
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.
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.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 44)
What This Means (2024 FDD)
According to Fly To Fit's 2024 Franchise Disclosure Document, ASC 606, or Accounting Standards Codification Topic 606, is crucial for how Fly To Fit recognizes revenue. Fly To Fit recognizes revenue from franchise fees, both one-time and recurring monthly fees. ASC 606 dictates that revenue is recognized when there is persuasive evidence of an arrangement, delivery has occurred or services have been rendered, the price is fixed or determinable, and collectability is reasonably assured. This means Fly To Fit must carefully evaluate arrangement terms and customer information to ensure these criteria are met before recognizing any revenue. This ensures that Fly To Fit's revenue recognition is compliant with US GAAP.
Furthermore, 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,' allows private company franchisors like Fly To Fit to account for preopening services provided to a franchisee as distinct from the franchise license, provided these services align with a predefined list within the guidance. Fly To Fit has elected to adopt this new standard. This election allows Fly To Fit to separate out certain pre-opening activities that are not brand specific and provide general business information to the franchisee, accounting for them as a separate performance obligation.
Fly To Fit estimates the stand-alone selling price of pre-opening activities using an adjusted market assessment approach. The initial franchise fees and fixed consideration are allocated to the training services that are not brand specific, with any residual amount allocated to the right to access Fly To Fit's intellectual property. The consideration allocated to pre-opening activities that are not brand specific is recognized ratably as those services are 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. This detailed approach ensures that Fly To Fit accurately reflects when and how revenue is earned from its various franchise-related activities.