What accounting standard does Antioch Pizza Shop use for revenue recognition?
Antioch_Pizza_Shop Franchise · 2025 FDDAnswer from 2025 FDD Document
The Company has adopted ASC 606, Revenue from Contracts with Customers. ASC 606 provides that revenues are to be recognized when control of promised goods or services is transferred to a customer in an amount that reflects the considerations expected to be received for those goods or services. In implementing ASC 606, the Company evaluated all revenue sources using the five-step approach: identify the contract, identify the performance obligations, determine the transaction price, allocate the transaction price, and recognize revenue. For each franchised location, the Company enters into a formal franchise agreement that clearly outlines the various components of the transaction price and the Company's performance obligations.
The Company's revenues consist of initial franchise fees and royalties and marketing fees based on a percentage of gross revenues.
Royalty and marketing fees
Upon evaluation of the five-step process, the Company has determined that royalty and marketing fees are to be recognized in the same period as the underlying sales.
Initial franchise fees
The Company is required to allocate the transaction price associated with initial franchise fees between the franchise license and associated performance obligations. In identifying the associated performance obligations, the Company has elected to adopt the practical expedient for private company franchisors outlined in ASC 952- 606, Franchisors—Revenue from Contracts with Customers. In addition, the practical expedient allows franchisors to account for pre-opening services as a single distinct performance obligation, which the Company has elected to adopt. These pre-opening services include the following (which the Company may or may not provide all of):
- Assistance in the selection of a site
- Assistance in obtaining facilities and preparing the facilities for their intended use, including related financing, architectural, and engineering services, and lease negotiation
- Training of the franchisee's personnel or the franchisee
- Preparation and distribution of manuals and similar material concerning operations, administration, and record keeping
- Bookkeeping, information technology, and advisory services, including setting up the franchisee's records and advising the franchisee about income, real estate, and other taxes about local regulations affecting the franchisee's business
- Inspection, testing, and other quality control programs
In determining the allocation of transaction price (the initial franchise fee) to either the license or to the preopening services, the Company has determined that the standalone selling price of its pre-opening services exceeds the initial franchise fee received; as such, the Company allocates the entire initial franchise fees to those preopening services. The franchise fees are then recognized as revenue when those pre-opening services have been completed (which generally occurs upon commencement of the associated franchised location's operations).
Source: Item 21 — Financial Statements (FDD page 56)
What This Means (2025 FDD)
According to the 2025 FDD, Antioch Pizza Shop has adopted ASC 606, Revenue from Contracts with Customers. This accounting standard dictates that revenues are recognized when control of promised goods or services is transferred to a customer, reflecting the consideration expected to be received for those goods or services. In implementing ASC 606, Antioch Pizza Shop uses a five-step approach to evaluate all revenue sources: identifying the contract, identifying performance obligations, determining the transaction price, allocating the transaction price, and recognizing revenue. For each franchised location, Antioch Pizza Shop enters into a formal franchise agreement that outlines the components of the transaction price and the company's performance obligations.
Antioch Pizza Shop's revenues consist of initial franchise fees, royalties, and marketing fees based on a percentage of gross revenues. Royalty and marketing fees are recognized in the same period as the underlying sales. For initial franchise fees, Antioch Pizza Shop allocates the transaction price between the franchise license and associated pre-opening services. They have elected to adopt the practical expedient for private company franchisors outlined in ASC 952-606, Franchisors—Revenue from Contracts with Customers, which allows them to account for pre-opening services as a single distinct performance obligation. These pre-opening services may include site selection assistance, facility preparation, personnel training, and the provision of operational manuals.
Since the standalone selling price of Antioch Pizza Shop's pre-opening services exceeds the initial franchise fee, the company allocates the entire initial franchise fees to these services. The franchise fees are then recognized as revenue when the pre-opening services have been completed, which generally occurs when the franchised location begins operations. This means that Antioch Pizza Shop does not recognize the initial franchise fee as revenue until the franchisee has opened their location and is actively operating. This approach ensures that revenue recognition is aligned with the delivery of services and the transfer of value to the franchisee.