What credit loss methodology does Monicals Pizza's credit policy describe?
Monicals_Pizza Franchise · 2025 FDDAnswer from 2025 FDD Document
The Company's credit policies are subject to FASB Accounting Standards Update (ASU) No. 2016- 13, Financial Instruments—Credit Losses (Topic 326). ASU No. 2016-13 describes a credit loss methodology, Current Expected Credit Losses (CECL). The CECL methodology utilizes a lifetime expected credit loss measurement objective for the recognition of credit losses at the time the financial asset is originated or acquired. The expected credit losses are adjusted each period for changes in expected lifetime credit losses.
The Company utilizes the loss rate method in determining its lifetime expected credit losses on its receivables. This method is used for calculating an estimate of losses based primarily on the Company's historical loss experience. In determining its loss rates, the Company evaluates information related to its historical losses, adjusted for current conditions and further adjusted for the period of time that can be reasonably forecasted. Qualitative and quantitative adjustments related to current conditions and the reasonable and supportable forecast period consider all the following: past due receivables, the customer creditworthiness, changes in the terms of receivables, effect of other external forces such as competition and legal and regulatory requirements on the level of estimated credit losses in the existing receivables. For receivables that are not expected to be collected within the normal business cycle, the Company considers current and forecasted direction of the economic and business environment. Such forecasted information includes, but is not limited to, gross domestic product (GDP) growth, unemployment rates and interest rates.
No allowance for credit losses was necessary at December 31, 2024 and 2023.
Source: Item 23 — RECEIPTS (FDD pages 46–257)
What This Means (2025 FDD)
According to Monicals Pizza's 2025 Franchise Disclosure Document, their credit policies adhere to FASB Accounting Standards Update (ASU) No. 2016-13, Financial Instruments—Credit Losses (Topic 326). This update introduces the Current Expected Credit Losses (CECL) methodology. The CECL methodology requires Monicals Pizza to measure lifetime expected credit losses when a financial asset is first originated or acquired, and to adjust these expected credit losses each period to reflect any changes. This means Monicals Pizza must estimate potential credit losses over the entire life of their receivables, not just losses that are currently probable.
To determine these lifetime expected credit losses on receivables, Monicals Pizza uses the loss rate method. This method calculates an estimate of losses based primarily on the company's historical loss experience. In determining loss rates, Monicals Pizza evaluates information related to its historical losses, adjusted for current conditions and further adjusted for the period of time that can be reasonably forecasted.
Monicals Pizza makes qualitative and quantitative adjustments related to current conditions and the reasonable and supportable forecast period, considering factors such as past due receivables, customer creditworthiness, changes in the terms of receivables, and the effect of external forces like competition and legal/regulatory requirements. For receivables not expected to be collected within the normal business cycle, the company considers the current and forecasted direction of the economic and business environment, including factors like gross domestic product (GDP) growth, unemployment rates, and interest rates. As of December 31, 2024 and 2023, no allowance for credit losses was deemed necessary.