What impact did the adoption of ASU No. 2014-09 have on the Gokhale Method's financial statements?
Gokhale_Method Franchise · 2024 FDDAnswer from 2024 FDD Document
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, the adoption of Accounting Standards Update (ASU) No. 2014-09, "Revenue from Contracts with Customers (Topic 606)" did not have a material impact on the company's financial statements. This ASU, issued by the Financial Accounting Standards Board (FASB) in May 2014, replaced most existing revenue recognition guidance in U.S. GAAP and required expanded disclosures about revenue and cash flows from customer contracts. Gokhale Method adopted the standard on January 1, 2020, using the modified retrospective approach.
Under ASC 606, Gokhale Method recognizes revenues by identifying contracts, performance obligations, determining transaction prices, allocating prices to obligations, and recognizing revenue as obligations are satisfied. The company's revenues primarily come from royalties and franchise fees. Royalty revenue is recognized when students participate in classes, with payments processed either by Gokhale Method Enterprise (GME) or the teacher. GME remits royalties to Gokhale Method Institute (GMI), while teachers are invoiced for net royalties.
For a prospective franchisee, this means that the adoption of ASU 2014-09 did not significantly alter how Gokhale Method reports its financial performance. The company's revenue recognition policies are now aligned with ASC 606, providing a standardized approach to reporting revenue from royalties and franchise fees. This ensures that revenue is recognized when the services are provided, specifically when students attend classes. The franchisee should be aware of how royalties are calculated and remitted, whether through GME or directly by the teacher, as this affects the franchisee's payment process.