When does Hyper Kidz recognize revenue from initial franchise fees?
Hyper_Kidz Franchise · 2024 FDDAnswer from 2024 FDD Document
Revenue from initial franchise fees is allocated to the performance obligations in the franchise agreement that are distinct from the territory rights and symbolic intellectual property. The amount allocated to each identified performance obligation is determined using the expected cost plus a margin or fair market value approach. Revenue from initial fees is recognized when the performance obligation is satisfied and control of the good or service has been transferred to the franchisee. Unearned initial fee revenues will be recorded as non-refundable deferred revenue. Commissions and other direct costs related to unsatisfied performance obligations will be recorded as a franchise acquisition asset and are recognized as expense when the related performance obligation has been satisfied.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 52)
What This Means (2024 FDD)
According to the 2024 Hyper Kidz Franchise Disclosure Document, the company recognizes revenue from initial franchise fees when the performance obligation is satisfied, and control of the good or service has been transferred to the franchisee. This means Hyper Kidz does not immediately recognize the entire initial franchise fee as revenue upon payment. Instead, it allocates the fee to different performance obligations outlined in the franchise agreement, separate from the territory rights and intellectual property.
The amount allocated to each performance obligation is determined using the expected cost plus a margin or fair market value approach. This could include items such as training, site selection assistance, or providing initial equipment. Hyper Kidz recognizes revenue as it fulfills each of these obligations.
Any portion of the initial franchise fee that has not yet been earned is recorded as non-refundable deferred revenue. These unearned fees are recognized in future periods as Hyper Kidz continues to fulfill its obligations to the franchisee. Additionally, commissions and other direct costs related to these unfulfilled performance obligations are recorded as franchise acquisition assets and expensed as the related performance obligations are satisfied.