What costs does Kidokinetics defer and record as deferred contract costs?
Kidokinetics Franchise · 2024 FDDAnswer from 2024 FDD Document
The Company's franchise agreements generally provide for a payment of initial fees as well as continuing royalties, technology fees, and marketing fees to the Company based on a percentage of sales. Under the franchise agreement, franchisees are granted the right to operate a location using the Kidokinetics system for a period of ten years. Under the Company's revenue recognition policy, the Company allocates a portion of the initial franchise fee to pre-opening services, which is recognized when the franchise begins operations. The remainder is deferred, and the revenue is amortized over the life of the contract. In addition, the Company defers related contract costs such as broker commissions and training costs over the same period and records them as deferred contract costs.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 59)
What This Means (2024 FDD)
According to Kidokinetics's 2024 Franchise Disclosure Document, certain costs are deferred and recorded as deferred contract costs. Specifically, Kidokinetics defers broker commissions and training costs related to franchise agreements. These costs are deferred over the life of the franchise contract.
This means that when Kidokinetics incurs expenses like broker commissions for selling a franchise or the costs of training a new franchisee, they don't immediately recognize these as expenses on their income statement. Instead, they capitalize these costs as 'deferred contract costs' on their balance sheet. The 2024 FDD indicates that as of December 31, 2023, the current portion of deferred contract costs was $340,727, and the non-current portion was $1,173,255.
Over the ten-year term of the franchise agreement, Kidokinetics amortizes these deferred costs, gradually recognizing them as expenses. This accounting treatment aligns the recognition of these costs with the period over which Kidokinetics expects to benefit from the franchise agreement. For a prospective franchisee, understanding these deferred costs provides insight into Kidokinetics's financial practices and how they manage expenses related to franchise development and support.