Under Topic 606, when does B Bops recognize revenue?
B_Bops Franchise · 2025 FDDAnswer from 2025 FDD Document
Revenue is recognized when promised goods are transferred to customers in an amount that reflects the consideration that the Company expects to be entitled in exchange for those goods by following a five-step process, (1) identify the contract with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price, and (5) recognize revenue when or as the Company satisfies a performance obligation. The Company has assessed revenue recognition under the five-step process, as follows:
Identify the contract with a customer. The Company generally considers a contract with a customer to be a signed or oral agreement to enter into a franchise agreement/contract provided that collection is considered probable, which is assessed based on the creditworthiness of the customer as determined by credit checks, payment histories, and/or other circumstances.
Identify the performance obligations in the contract. The performance obligations include the right of use of the franchise license and right to operate a B-Bop's Franchise.
Determine the transaction price. The transaction price for the Company's contracts with its customers for franchise fees consists of fixed consideration as identified in the contract. Fixed consideration includes amounts to be contractually billed to the customer and payable in cash. The Company generally invoices customers at the time both parties agree to enter into a franchise contract. Customer invoices are generally due within 30 days after issuance. The transaction price for royalty fees is determined to be 5% of gross sales of the franchise each month. The Company's contracts with customers typically do not include financing components as the period between the transfer of performance obligations and timing of payment are generally within one month.
Allocate the transaction price to the performance obligations in the contract. The Company's contracts with customers generally consist of two performance obligations, which is the right to purchase the use of the franchise license and then the right to use the license over the term of the contract.
Recognize revenue when or as the Company satisfies a performance obligation. Revenues for franchise fees are recognized at a point in time, which is generally upon oral or written agreement for a franchise contract, which, at this point, right to use the franchise license passes to the customer. Management exercises judgment in determining when such performance obligations for goods have been satisfied. Revenue is also recognized over time as the royalty income per the contract is based on a percentage of gross sales of the franchise and is recognized on a monthly basis when they are earned per the agreement.
Source: Item 21 — FINANCIAL STATEMENTS (FDD pages 52–53)
What This Means (2025 FDD)
According to B Bops's 2025 Franchise Disclosure Document, the company recognizes revenue based on a five-step process under Topic 606. This process includes identifying the contract, identifying performance obligations, determining the transaction price, allocating the transaction price, and recognizing revenue as performance obligations are satisfied. For B Bops, a contract is generally considered valid when there's a signed or oral agreement, assuming collection is probable based on the customer's creditworthiness. The performance obligations include granting the right to use the franchise license and operate a B Bops franchise.
The transaction price for franchise fees is fixed and invoiced to customers, typically due within 30 days. Royalty fees are determined as 5% of the franchise's gross sales each month. B Bops recognizes revenue for franchise fees at a specific point in time, usually upon oral or written agreement when the right to use the franchise license is transferred to the customer. This requires management to exercise judgment in determining when these obligations are met. Royalty income, on the other hand, is recognized over time, monthly, as it is earned based on a percentage of gross sales, per the franchise agreement.
For a prospective franchisee, this means that B Bops recognizes the initial franchise fee revenue relatively early in the relationship, upon agreement, while the ongoing royalty revenue is recognized as it's earned each month based on sales. This revenue recognition policy is important for franchisees to understand as it reflects how B Bops's financial performance is measured and reported. Franchisees should ensure they understand the terms of the franchise agreement regarding payment schedules and royalty calculations to align with B Bops's revenue recognition practices.