Does Management Recruiters consolidate the financial statements of franchisees considered Variable Interest Entities (VIEs)?
Management_Recruiters Franchise · 2024 FDDAnswer from 2024 FDD Document
or a fair presentation of the results for the periods presented.
Consolidation
The consolidated financial statements include the accounts of HQI and all of its wholly-owned subsidiaries. Intercompany balances and transactions have been eliminated.
U.S. GAAP requires the primary beneficiary of a variable interest entity (a "VIE"), to consolidate that entity. To be the primary beneficiary of a VIE, an entity must have both the power to direct the activities that most significantly impact the VIE's economic performance, and the obligation to absorb losses or the right to receive benefits from the VIE that are significant to it. We provide acquisition financing to some of our franchisees that results in some of them being considered a VIE. We have reviewed these franchisees and determined that we are not the primary beneficiary of any of these entities, and accordingly, these entities have not been consolidated.
Cost of Staffing Revenue
Cost of staffing revenue at owned locations consists of temporary employee wages, the related payroll taxes, workers' compensation expenses, and other direct costs of services
Use of Estimates
The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. Actual results could differ from those estimates.
Significant estimates and assumptions underlie our workers' compensation claim liabilities, our workers' compensation Risk Management Incentive Program, our deferred taxes, our allowance for losses on notes receivable, and estimated fair value of assets and liabilities acquired.
Source: Item 21 — FINANCIAL STATEMENTS (FDD pages 65–66)
What This Means (2024 FDD)
According to Management Recruiters' 2024 Franchise Disclosure Document, Management Recruiters does not consolidate the financial statements of franchisees considered Variable Interest Entities (VIEs). The FDD states that U.S. GAAP requires the primary beneficiary of a VIE to consolidate that entity. To be the primary beneficiary, an entity must have the power to direct the activities that most significantly impact the VIE's economic performance and the obligation to absorb losses or the right to receive benefits from the VIE that are significant to it.
Management Recruiters provides acquisition financing to some franchisees, which results in some of them being considered VIEs. However, Management Recruiters has reviewed these franchisees and determined that it is not the primary beneficiary of any of these entities. Therefore, Management Recruiters does not consolidate these entities' financial statements with its own.
In some instances, Management Recruiters finances the sale of acquired offices to new franchisees with notes receivable, which can result in certain franchises being considered VIEs. Management Recruiters has determined that they are not required to consolidate these entities because they do not have the power to direct these entities' daily operations. If these franchises default on these notes, Management Recruiters bears the risk of loss of the outstanding balance on these notes, less what they could recoup from the potential resale of the repossessed office. The balance due from the franchises determined to be VIE's on December 31, 2023 and December 31, 2022 was approximately $8.2 million and $2.8 million, respectively.