What are the five steps Kidokinetics uses to evaluate all revenue sources when implementing ASC 606?

According to Kidokinetics's 2024 Franchise Disclosure Document, when implementing ASC 606, Revenue from Contracts with Customers, Kidokinetics uses a five-step approach to evaluate all revenue sources. These five steps are: identifying the contract, identifying the performance obligations, determining the transaction price, allocating the transaction price, and recognizing revenue. This approach ensures that Kidokinetics recognizes revenue when control of promised goods or services is transferred to a customer, reflecting the consideration expected to be received for those goods or services.

For a prospective Kidokinetics franchisee, understanding these steps is crucial because it dictates how and when Kidokinetics recognizes revenue from various sources, including initial franchise fees, royalties, marketing fees, and service revenue. The initial franchise fee has a portion allocated to pre-opening services, which is recognized when the franchise begins operations, while the remainder is deferred and amortized over the life of the contract. This revenue recognition policy also affects how Kidokinetics handles related contract costs, such as broker commissions and training costs, which are deferred over the same period.

Adopting ASC 606 impacts Kidokinetics's financial reporting by providing a structured framework for revenue recognition. This framework ensures that revenue is recognized consistently and transparently, aligning with accounting standards. For franchisees, this means that the financial statements of Kidokinetics, as presented in the FDD, are prepared using a standardized approach to revenue recognition, which can aid in assessing the financial health and performance of the franchisor.