According to Gokhale Method's accounting pronouncement, when is revenue recognized?
Gokhale_Method Franchise · 2024 FDDAnswer from 2024 FDD Document
The Company utilizes the allowance method of accounting for doubtful accounts. The allowance is based on management's review of all past due accounts. As of December 31, 2021 and 2020, management believes that all receivables are collectable after year end.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Revenue Recognition
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, "Revenue from Contracts with Customers (Topic 606)". The ASU and all subsequently issued clarifying ASUs replaced most existing revenue recognition guidance in U.S. GAAP. The ASU also required expanded disclosures relating to the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The Company adopted the new standard effective January 1, 2020, the first day of the Company's fiscal year, using the modified retrospective approach. The adoption of this standard did not have a material impact on the Company's financial statements.
Pursuant to ASC 606, revenues are recognized upon applying the following steps:
- Identification of the contract(s) with a customer;
- Identification of the performance obligations in the contract;
- · Determination of the transaction price;
- · Allocation of the transaction price to performance obligations in the contract;
- · Recognition of revenues when, or as, the contractual obligations are satisfied.
Nature of products and services: The Company derives its revenues primarily from royalties and franchise fees.
Royalty revenue pertains to a pre-determined amount or percentage for each course taught based on the type of course taught and the number of participants. For royalty, revenue is recognized when students participate in the class. For many of these classes, the payment is processed or collected by GME or the teacher. If the payment is collected by GME, the royalties due to GMI on these classes are periodically remitted to GMI by GME. If the payment is collected by the teacher, GMI will create an invoice for the net royalty.
Source: Item 22 — CONTRACTS (FDD page 34)
What This Means (2024 FDD)
According to Gokhale Method's 2024 Franchise Disclosure Document, revenue recognition is based on Accounting Standards Update (ASU) No. 2014-09, "Revenue from Contracts with Customers (Topic 606)." This standard replaced most existing revenue recognition guidance in U.S. GAAP and requires expanded disclosures about the nature, amount, timing, and uncertainty of revenue and cash flows from customer contracts. Gokhale Method adopted this standard on January 1, 2020, using a modified retrospective approach, which did not materially impact their financial statements.
Under ASC 606, Gokhale Method recognizes revenues by following a five-step process: (1) identifying the contract with a customer; (2) identifying the performance obligations in the contract; (3) determining the transaction price; (4) allocating the transaction price to the performance obligations; and (5) recognizing revenues when the contractual obligations are satisfied. Gokhale Method primarily generates revenue from royalties and franchise fees.
Specifically, royalty revenue, which is a pre-determined amount or percentage for each course taught, is recognized when students participate in the class. The payment for these classes is often processed or collected either by Gokhale Method Enterprises (GME) or by the teacher. If GME collects the payment, they periodically remit the royalties due to Gokhale Method Institute (GMI). If the teacher collects the payment, GMI will invoice the teacher for the net royalty. For a prospective franchisee, this means that revenue is tied directly to student participation and the method of payment collection can vary.