According to Learningrx, when are the initial franchise fees recognized as revenue?
Learningrx Franchise · 2025 FDDAnswer from 2025 FDD Document
Upon evaluation of the five-step process, the Corporation has determined that this standard does not impact the recognition of royalties, marketing fees, and technology fees from locations operated by a franchisee, which are based on a percentage of gross revenue and recognized at the time the underlying sales occur. ASC 606 does have an effect on the process management uses to evaluate the recognition of the initial franchise fees.
In allocating the transaction price and recognizing the revenue associated with initial franchise fees, the Corporation has elected to adopt the practical expedient for private company franchisors outlined in ASC 952-606, Franchisors—Revenue from Contracts with Customers. The practical expedient allows franchisors to account for pre-opening services as a single distinct performance obligation. These preopening services include the following:
- Assistance in the selection of a site
- Assistance in obtaining facilities and preparing the facilities for their intended use, including related financing, architectural, and engineering services, and lease negotiation
- Training of the franchisee's personnel or the franchisee in the LearningRx processes and systems
- Preparation and distribution of manuals and similar material concerning operations, administration, and record keeping
- Bookkeeping, information technology, and advisory services, including setting up the franchisee's
- Inspection, testing, and other quality control programs
The Corporation has determined that the fair value of pre-opening services exceeds the initial fees received; as such, the initial fees are allocated to the pre-opening services, which are recognized as revenue upon commencement of operations.
Source: Item 23 — RECEIPT (FDD pages 54–209)
What This Means (2025 FDD)
According to Learningrx's 2025 Franchise Disclosure Document, the corporation recognizes initial franchise fees as revenue upon commencement of operations. This is because Learningrx has elected to adopt the practical expedient for private company franchisors outlined in ASC 952-606, which allows them to account for pre-opening services as a single distinct performance obligation. These pre-opening services include site selection assistance, help with facilities and preparation, franchisee personnel training, manuals, bookkeeping, IT, advisory services, inspections, testing, and quality control programs.
Learningrx has determined that the fair value of these pre-opening services exceeds the initial fees received. Therefore, the initial fees are allocated to these pre-opening services. This means that Learningrx does not recognize the initial franchise fee as revenue immediately upon receipt.
For a prospective Learningrx franchisee, this accounting practice means that Learningrx recognizes the revenue from your initial franchise fee over time as they provide you with the pre-opening services outlined in the FDD, rather than all at once when you sign the agreement. This approach aligns revenue recognition with the delivery of services, which is a common practice in the franchise industry.