What method does Monicals Pizza utilize to determine lifetime expected credit losses on its receivables?
Monicals_Pizza Franchise · 2025 FDDAnswer from 2025 FDD Document
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 the 2025 FDD, Monicals Pizza uses the loss rate method to determine lifetime expected credit losses on its receivables. This approach calculates estimated losses primarily based on the company's historical loss experience.
To determine these loss rates, Monicals Pizza evaluates information related to its historical losses, making adjustments for current conditions and further adjustments for a reasonably forecasted period. The company considers both qualitative and quantitative factors, including past due receivables, customer creditworthiness, changes in receivable terms, and the impact of external forces like competition and legal/regulatory requirements.
For receivables not expected to be collected within the normal business cycle, Monicals Pizza considers the current and forecasted direction of the economic and business environment. This includes factors such as gross domestic product (GDP) growth, unemployment rates, and interest rates. The FDD states that no allowance for credit losses was necessary as of December 31, 2024, and 2023.
This method is compliant with FASB Accounting Standards Update (ASU) No. 2016-13, Financial Instruments—Credit Losses (Topic 326), which requires a Current Expected Credit Losses (CECL) methodology. This means Monicals Pizza recognizes credit losses at the time the financial asset is originated or acquired, adjusting these expected credit losses each period for changes in lifetime expected credit losses. For a prospective franchisee, this indicates that Monicals Pizza is proactive in managing and accounting for potential credit losses, which could affect the financial stability of the company and, by extension, its franchisees.