How does Pearce Bespoke account for deferred commissions related to franchise sales?
Pearce_Bespoke Franchise · 2025 FDDAnswer from 2025 FDD Document
The Company considers all highly liquid investments with a maturity of three months or less at the time of purchase to be cash equivalents. The Company had no cash or cash equivalents as of December 31, 2024.
Accounts Receivable
The timing of revenue recognition may be different from the timing of invoicing to customers. The Company records an accounts receivable when revenue is recognized prior to invoicing, or unearned revenue when revenue is recognized after invoicing. Management evaluates individual customers' receivables considering their financial condition, credit history and current economic conditions. Accounts receivable are written off if deemed uncollectible and recoveries of accounts receivable previously written off are recorded as income when received. The Company did not have any allowance for doubtful accounts as of December 31, 2024, and did not write off any accounts receivable during the year ended December 31, 2024.
NOTE 1 – NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Deferred Commissions
Deferred commissions consist of commissions paid on the sale of a franchise by the Company. They are capitalized as an incremental cost of the franchise agreement and are recognized as an expense over the life of the franchise agreement under the guidance of ASC 340-40, "Other Assets and Deferred Costs - Contracts with Customers".
Franchisee Revenue Recognition and Non-refundable Deferred Franchise Fee Revenue
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 39)
What This Means (2025 FDD)
According to Pearce Bespoke's 2025 Franchise Disclosure Document, deferred commissions consist of commissions paid on the sale of a franchise by the company. These commissions are capitalized as an incremental cost of the franchise agreement. This means that instead of expensing the commission immediately, Pearce Bespoke records it as an asset on its balance sheet.
Pearce Bespoke recognizes these deferred commissions as an expense over the life of the franchise agreement, following the guidance of ASC 340-40, "Other Assets and Deferred Costs - Contracts with Customers". This accounting standard provides guidelines on how to handle costs associated with contracts with customers, ensuring that expenses are matched with the revenues they help generate over the contract's duration. For Pearce Bespoke, this means the commission expense is spread out over the term of the franchise agreement, which is typically ten years.
The FDD provides specific figures related to deferred commissions as of December 31, 2024. The balance of deferred commissions at the beginning of the year was $691,186. During the year, an additional $156,000 was deferred for franchise sale commissions. However, $145,502 of franchise sale commissions were recognized during the year. Consequently, the balance of deferred commissions at the end of the year was $701,684. This detailed breakdown allows potential franchisees to understand how Pearce Bespoke manages and accounts for these commission expenses over time.