What methodology does Itan use for measuring expected credit losses?
Itan Franchise · 2025 FDDAnswer from 2025 FDD Document
$250,000 per bank as of December 31, 2024 and 2023. The Company had $0 and $104,387 that were in excess of the FDIC limit as of December 31, 2024 and 2023, respectively. Management believes that the Company is not exposed to any significant credit risk with respect to its cash.
Accounts receivable - Accounts receivable consist mainly of monthly royalties and marketing funds due according to franchise agreements. Management assesses the collectability of accounts receivable at the close of each period and records an allowance for doubtful accounts based on specific identification. Management has determined all accounts to be collectible at December 31, 2024 and 2023.
Credit losses - The Company follows standards applicable to accounting for credit losses, which replaces the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (CECL) methodology. The measurement of expected credit losses under the CECL methodology is applicable to trading receivables, financing receivables, held-to-maturity debt securities, and receivables relating to repurchase agreements and securities lending agreements. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments) and net investments in leases recognized
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by a lessor in accordance with Topic 842 on leases. Receivables held by the Company are subject to this guidance. At December 31, 2024 and 2023 the Company had no allowances for credit losses.
Property and equipment - Property and equipment are carried at cost. Depreciation is computed using the straight-line method of depreciation over the assets estimated useful lives of five years. Maintenance and repairs are charged to the expense as incurred; major renewals and betterments are capitalized. When items of property and equipment are sold or retired, the related cost and accumulated depreciation are removed from the accounts, and any gain or loss is included in income.
The Company follows Accounting Standards Update No. 2014-09, 2016-08, 2016-10, 2016-12 and 2016-20, collectively implemented as FASB Accounting Standards Codification ("ASC") Topic 606 ("ASC 606") Revenue from Contracts with Customers, provides guidance for revenue recognition.
Source: Item 23 — RECEIPT (FDD pages 44–190)
What This Means (2025 FDD)
According to Itan's 2025 Franchise Disclosure Document, the company adheres to accounting standards for credit losses, employing the current expected credit loss (CECL) methodology. This approach replaces the previous incurred loss methodology. The CECL methodology is applied to various financial instruments, including trading receivables, financing receivables, held-to-maturity debt securities, receivables related to repurchase agreements and securities lending agreements, off-balance sheet credit exposures not accounted for as insurance, and net investments in leases recognized by a lessor.
Itan adopted ASC 326 using a modified retrospective transition approach, recording an adjustment to retained earnings for the cumulative effect of adopting the standard as of January 1, 2023. However, upon review, Itan determined that the adoption of this new standard had no material impact on their financial assets presentation.
For a prospective Itan franchisee, this information is relevant for understanding how Itan accounts for potential credit losses within its financial statements. While the company states that the CECL methodology had no material impact on its financial assets, it is essential to understand the potential implications of this methodology on the franchisee's own financial reporting, especially if the franchisee extends credit to customers. It would be prudent for a potential franchisee to consult with a financial advisor to fully understand the implications of CECL and other accounting standards on their business.