For Bens Soft Pretzels, what accounting standard dictates how franchise fee revenue is recognized?
Bens_Soft_Pretzels Franchise · 2025 FDDAnswer from 2025 FDD Document
The Company recognizes revenue in accordance with ASC 606. There are four sources of revenue: initial franchise fees, royalty fees, advertising fund fees, and other income. In general, revenue is recognized when the Company satisfies a performance obligation by transferring control over a product or service to a customer. The revenue recognition policy for each revenue stream is as follows:
Initial Franchise Fee Revenue – The Company enters into franchise or license agreements that grant franchisees or licensees the right to operate individual Ben's Soft Pretzels locations in exchange for an initial franchise fee. The Company's performance obligations consist of the franchise license which includes the use of the brand, initial services including pre-opening training, and ongoing services including advertising and operational support. Management has determined that these performance obligations are highly interrelated and therefore are not considered to be distinct under ASC 606. As a result, they are accounted for as a single performance obligation which is satisfied by providing the right to use the Company's intellectual property over the initial term of the franchise agreement. Beginning in June 2018, the initial franchise or license agreement is for five years and contains two options to renew for an additional five years each (for a total term of 15 years). Prior to this change in 2018, the initial franchise agreement was for seven years and contained two options to renew for an additional seven years each (for a total term of 21 years). Each option to renew includes an additional fee and is considered a separate performance obligation.
The Company recognizes the initial franchise fee on a straight-line basis using a mid-month convention over the initial term of the franchise or license agreement starting with the opening of the location. The opening is considered to take place when the Company has performed substantially all of the initial services required in the franchise or license agreement and when the franchisee or licensee begins to benefit from the rights included in the franchise or license agreement. Incidental items that are immaterial in the context of the contract are recognized as expense.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 46)
What This Means (2025 FDD)
According to the 2025 FDD, Bens Soft Pretzels recognizes revenue in accordance with ASC 606. The company has four revenue streams: initial franchise fees, royalty fees, advertising fund fees, and other income. In general, revenue is recognized when Bens Soft Pretzels satisfies a performance obligation by transferring control over a product or service to a customer.
For initial franchise fee revenue, Bens Soft Pretzels' performance obligations consist of the franchise license, including the use of the brand, initial services such as pre-opening training, and ongoing support like advertising and operational assistance. Because these obligations are highly interrelated, they are treated as a single performance obligation under ASC 606. This obligation is satisfied by providing the right to use the company's intellectual property over the initial term of the franchise agreement.
Specifically, Bens Soft Pretzels recognizes the initial franchise fee on a straight-line basis using a mid-month convention over the initial term of the franchise or license agreement, starting when the location opens. The opening is considered to occur when Bens Soft Pretzels has performed substantially all of the initial services required by the franchise agreement and when the franchisee begins to benefit from the rights included in the agreement. Incidental items that are immaterial are recognized as expenses.