What Accounting Standards Update has Hydrodog adopted regarding revenue recognition from contracts with customers?
Hydrodog Franchise · 2025 FDDAnswer from 2025 FDD Document
The Company has obligations to provide franchisees with the franchise rights to operate Hydrodog businesses, training, and other assistance to launch their franchise, as well as to provide software and technology services and brand marketing and advertising support. The Company has elected to adopt Accounting Standards Update No. 2021-02, Franchisors - Revenue from Contracts with Customers (Subtopic 952-606): Practical Expedient, to address concerns about the complexity of applying Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers, to private company franchisors, specifically relating to the amount and timing of revenue recognition for initial franchise fees. The Company has concluded that certain preopening services (training, site selection, etc.) are a separate performance obligation distinct from the franchise license. Therefore, initial franchise fees for preopening services are allocated between the preopening services and the franchise right for each individual franchise. The preopening services revenue is recognized when the franchise is opened, as the Company cannot reasonably estimate its progress toward satisfaction of that obligation. Typically, the initial franchise fee is less than the stand-alone selling price of the preopening services provided; therefore, the initial fee is fully recognized by the time the business opens.
Source: Item 23 — RECEIPTS (FDD pages 43–166)
What This Means (2025 FDD)
According to Hydrodog's 2025 Franchise Disclosure Document, the company has elected to adopt Accounting Standards Update No. 2021-02, Franchisors - Revenue from Contracts with Customers (Subtopic 952-606): Practical Expedient. This update addresses concerns about the complexity of applying Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers, specifically relating to the amount and timing of revenue recognition for initial franchise fees for private company franchisors.
Hydrodog has determined that certain preopening services, such as training and site selection, are a separate performance obligation from the franchise license itself. As a result, initial franchise fees are allocated between these preopening services and the franchise right. The revenue from preopening services is recognized when the franchise opens because Hydrodog cannot reasonably estimate its progress toward satisfying that obligation before then.
Typically, the initial franchise fee is less than the stand-alone selling price of the preopening services. Therefore, the entire initial franchise fee is usually recognized by the time the Hydrodog business opens. This accounting treatment affects how Hydrodog reports its revenue and could impact its financial statements. For a prospective franchisee, this means that the initial franchise fee paid to Hydrodog is recognized as revenue by Hydrodog upon the opening of the franchise.