What accounting standard did Learningrx adopt on January 1, 2020, and how did they implement it?
Learningrx Franchise · 2025 FDDAnswer from 2025 FDD Document
On January 1, 2020, the Corporation adopted ASC 606, Revenue from Contracts with Customers using the modified retrospective method. This method allows the standard to be applied retrospectively through a cumulative catch-up adjustment recognized upon adoption. As such, comparative information in the Corporation's financial statements has not been restated and continues to be reported under the accounting standards in effect for those periods. Management determined that the effect of adopting ASC 606 did not have a material effect on the Corporation's financial statements.
ASC 606 provides that revenues are to be recognized when control of promised goods or services is transferred to a customer in an amount that reflects the considerations expected to be received for those goods or services. In implementing ASC 606, the Corporation evaluated all revenue sources using the fivestep approach: identify the contract, identify the performance obligations, determine the transaction price, allocate the transaction price, and recognize revenue.
For each franchised location, the Corporation enters into a formal franchise agreement that clearly outlines the transaction price, which includes an initial fee and ongoing royalties, marketing fees, and technology fees, and the Corporation's performance obligations.
Source: Item 23 — RECEIPT (FDD pages 54–209)
What This Means (2025 FDD)
According to Learningrx's 2025 Franchise Disclosure Document, the company adopted ASC 606, Revenue from Contracts with Customers, on January 1, 2020. They used the modified retrospective method for the adoption. This approach allowed Learningrx to apply the standard retroactively through a cumulative catch-up adjustment recognized upon adoption, without restating the comparative information in their financial statements for prior periods. The company continued to report comparative information under the accounting standards that were in effect for those periods.
In practical terms, this means that Learningrx made a one-time adjustment to account for the cumulative effect of the new revenue recognition standard, rather than going back and restating each prior period's financial results. This approach simplifies the implementation process. Management determined that adopting ASC 606 did not have a material effect on Learningrx's financial statements.
To implement ASC 606, Learningrx evaluated all revenue sources using a five-step approach. These steps included: identifying the contract with customers, identifying the performance obligations within the contract, determining the transaction price, allocating the transaction price to the performance obligations, and recognizing revenue when (or as) Learningrx satisfies each performance obligation. For Learningrx, this means that they carefully analyzed their franchise agreements to determine when and how revenue should be recognized, considering the initial fees, ongoing royalties, marketing fees, and technology fees they receive from franchisees, as well as their obligations to provide support and services.
For a prospective franchisee, this information provides insight into how Learningrx accounts for revenue and ensures compliance with accounting standards. While the adoption of ASC 606 did not have a material effect on Learningrx's financial statements, understanding the accounting policies can help franchisees interpret the financial information provided by the franchisor and assess the overall financial health of the company.