How does Auntie Annes recognize revenue related to the franchise right granted for each individual SBR?
Auntie_Annes Franchise · 2024 FDDAnswer from 2024 FDD Document
Revenue is recognized in accordance with a five-step revenue model, as follows: identifying the contract with the customer; identifying the performance obligations in the contract; determining the transaction price; allocating the transaction price to the performance obligations; and recognizing revenue when (or as) the performance obligation is satisfied. In applying this five-step model, the Company determined that the franchise right granted for each individual SBR within an arrangement represents a single performance obligation. Therefore, all consideration within the contract is allocated to the franchise right and recognized over the term of the franchise agreement.
Franchise revenues consists of revenues from franchising activities and are recognized based on the terms of the underlying franchise agreements.
Development fees are recorded as deferred franchise revenue when received and are recognized as revenue on a straight-line basis over the term of each underlying franchise agreement satisfying the development obligation, commencing when the SBR is opened.
Franchise fees are recorded as deferred revenue when received and are recognized as revenue on a straight-line basis over the term of each respective franchise agreement, commencing when the SBR is opened.
Source: Item 23 — RECEIPTS (FDD pages 106–366)
What This Means (2024 FDD)
According to Auntie Annes's 2024 Franchise Disclosure Document, the company uses a five-step revenue model to recognize revenue. The franchise right granted for each individual SBR (store, bakery, restaurant) is considered a single performance obligation. Therefore, all consideration within the contract is allocated to this franchise right and is recognized over the term of the franchise agreement. Franchise revenues from franchising activities are recognized based on the terms of the underlying franchise agreements.
Development fees are recorded as deferred franchise revenue when received. These fees are then recognized as revenue on a straight-line basis over the term of each underlying franchise agreement, starting when the SBR is opened and satisfying the development obligation. Similarly, franchise fees are recorded as deferred revenue when received and are recognized as revenue on a straight-line basis over the term of the franchise agreement, also commencing when the SBR is opened.
In summary, Auntie Annes defers the recognition of both development and franchise fees until the SBR opens. After the SBR is opened, the revenue is recognized evenly over the life of the franchise agreement. This accounting practice means that Auntie Annes does not recognize the full revenue upfront but spreads it out, reflecting the ongoing nature of the franchise relationship and support provided to the franchisee.