Under what accounting standard does Hyper Kidz recognize revenues?
Hyper_Kidz Franchise · 2024 FDDAnswer from 2024 FDD Document
The Company recognizes revenues under the guidance of ASC 606, "Contracts with Customers". The Company's revenue is principally generated through franchise agreements executed with the Company's franchisees.
Each franchise agreement is comprised of several performance obligations. The Company identifies those performance obligations, determines the contract price for each obligation, allocates the transaction price to each performance obligation and recognizes revenue when the Company has satisfied the performance obligation by transferring control of the good or service to the franchisee.
When a qualified party purchases a franchise, the Company grants the franchisee the right to operate the franchised business in a designated territory and to use the proprietary methods, techniques, trade dress,
trademarks, and logos ("symbolic intellectual property" or "IP"). Revenues related to the designated NOTE 1 – NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue Recognition, Non-refundable Deferred Franchise Fees, and Franchise Acquisition Assets (continued)
territory and IP are continuing royalties that are 6.0% of gross revenues. These revenues will be used to continue the development of the Company's brand, the franchise system and provide on-going support for the Company's franchisees. The royalties are billed weekly and are recognized as revenue when earned.
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.
Brand Fund Contribution
Contributions to the brand fund are 1% of gross revenue. Contributions are billed weekly and recognized as revenue when earned. The Company had no contributions to the brand fund during the years ended December 31, 2022, 2021, and 2020.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 52)
What This Means (2024 FDD)
According to Hyper Kidz's 2024 Franchise Disclosure Document, the company recognizes revenues under the guidance of ASC 606, "Contracts with Customers." This accounting standard is a comprehensive framework issued by the Financial Accounting Standards Board (FASB) for revenue recognition from contracts with customers. It outlines how and when revenue should be recognized. Hyper Kidz's revenue is primarily generated through franchise agreements with its franchisees.
Under ASC 606, Hyper Kidz identifies performance obligations within each franchise agreement. These obligations represent promises to transfer goods or services to the franchisee. The company then determines the contract price for each obligation and allocates the transaction price to each performance obligation. Revenue is recognized when Hyper Kidz satisfies a performance obligation by transferring control of the good or service to the franchisee.
For Hyper Kidz franchisees, this means that the initial franchise fee revenue is allocated to performance obligations distinct from territory rights and intellectual property. The allocation is based on 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 service is transferred. Any unearned initial fee revenues are recorded as non-refundable deferred revenue. Furthermore, commissions and direct costs related to unsatisfied performance obligations are recorded as a franchise acquisition asset and expensed when the related performance obligation is satisfied. Royalties, which are 6.0% of gross revenues, are billed weekly and recognized as revenue when earned. Contributions to the brand fund are 1% of gross revenue, billed weekly, and recognized as revenue when earned.