When does Mr. Sandless recognize revenues under the accrual method of accounting?
Mr_Sandless Franchise · 2025 FDDAnswer from 2025 FDD Document
Mr. Sandless and/or a DrDecknFence franchise businesses, which provides interior and exterior wood refinishing, wood care, wood cleaning and wood maintenance, as well as outdoor refinishing, cleaning, and maintenance.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Accounting-The accompanying financial statements have been prepared on an accrual basis of accounting in conformity with accounting principles generally accepted in the United States of America. Under the accrual method, revenues are recognized when earned and expenses are recognized when a liability is incurred, without regard to disbursement of cash.
Franchise Arrangements-The Company's franchise arrangements generally include a license which provides for payments of initial fees as well as continuing royalties to the Company based upon a percentage of sales. Under this arrangement, franchisees are granted the right to operate a Mr. Sandless franchise business for a specified number of years.
Concentration of Credit Risk-Financial instruments that potentially expose the Company to concentration of credit risk primarily consist of cash and cash equivalents and franchisee accounts receivable. The balances in the Company's cash accounts do not exceed the Federal Deposit Insurance (FDIC) limit of $ 250,000 at December 31, 2023. The Company maintains its cash and cash equivalents with accredited financial institutions.
Source: Item 21 — FINANCIAL STATEMENTS (FDD pages 41–42)
What This Means (2025 FDD)
According to Mr. Sandless's 2025 Franchise Disclosure Document, the company prepares its financial statements on an accrual basis, in accordance with accounting principles generally accepted in the United States of America. Under the accrual method, Mr. Sandless recognizes revenues when they are earned, and expenses are recognized when a liability is incurred, regardless of when cash changes hands. This means that revenue is recorded when the service is provided or the obligation is fulfilled, not necessarily when payment is received.
Mr. Sandless records revenue in accordance with Accounting Standards Board ("FASB") and Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers (Topic 606). The transaction price attributable to performance obligations are recognized as the performance obligations are satisfied. The portion of the franchise fee, if any, that is not attributable to a distinct performance obligation are amortized over the life of the related franchise agreements. Commission paid for franchises are amortized over the life of the franchise agreement. The company adopted ASC-606 and ASU 2021-02 using the modified retrospective method starting with January 1, 2020.
For a prospective Mr. Sandless franchisee, understanding this accounting method is crucial. It affects how the franchisor reports its financial performance and how certain fees, like franchise fees and commissions, are treated over time. For instance, non-refundable franchise fees, net of amounts earned based on allowable direct services, are recorded as deferred revenues and recognized over the life of the franchise agreement. This approach provides a more accurate picture of the company's financial health by matching revenues with the periods in which they are earned.
This accounting practice is standard in the franchise industry, ensuring that financial statements accurately reflect the economic reality of transactions. Franchisees should be aware of these policies as they review the franchisor's financial statements and consider their investment. Understanding how revenues and expenses are recognized helps in assessing the long-term financial stability and performance of Mr. Sandless.