According to Spray Net's accounting policies, when are revenues recognized?
Spray_Net Franchise · 2025 FDDAnswer from 2025 FDD Document
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.
In May 2014, the FASB issued a new accounting standard ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)", that attempts to establish a uniform basis for recording revenue to virtually all industries' financial statements. The revenue standard's core principle is to recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration expected to be received for those goods or services. The new standard changes how the Company records initial franchise fees from franchisees, area developer fees and brand development fees.
In compliance with the Financial Accounting Standards Board ("FASB") new accounting standards for revenue recognition ("Topic 606"), the Company records its non-refundable franchise fees, net of amounts earned based on allowable direct services, as deferred revenues, to be recognized over the life of the franchise agreement. The non-refundable franchise fees received but not yet earned as of December 31, 2024, 2023 and 2022 were $3,872,072, $3,134,425 and $3,355,822 respectively.
Source: Item 23 — RECEIPTS (FDD pages 75–219)
What This Means (2025 FDD)
According to Spray Net's 2025 Franchise Disclosure Document, the company recognizes revenues based on the accrual method of accounting. This means that Spray Net recognizes revenue when it is earned, regardless of when the cash is received. Specifically, the FDD notes that Spray Net follows accounting principles generally accepted in the United States of America, which dictate that revenues are recognized when earned and expenses are recognized when a liability is incurred, irrespective of when cash changes hands.
Furthermore, the document states that Spray Net had to adopt a new accounting standard (ASU No. 2014-09) that attempts to establish a uniform basis for recording revenue. The core principle of this standard is to recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration expected to be received. This standard also affects how Spray Net records initial franchise fees, area developer fees, and brand development fees.
For a prospective Spray Net franchisee, this accounting policy primarily affects how the franchisor recognizes revenue from franchise fees and royalties. Non-refundable franchise fees are recorded as deferred revenues and are recognized over the life of the franchise agreement, aligning with the period during which the franchisee benefits from the franchise rights and support provided by Spray Net. As of December 31, 2024, the non-refundable franchise fees received but not yet earned were $3,872,072. Understanding these accounting practices can provide franchisees with insight into the financial reporting and stability of Spray Net.