Does Better Blend recognize revenue before satisfying the applicable performance obligation?
Better_Blend Franchise · 2024 FDDAnswer from 2024 FDD Document
December 31, 2023 were not material to the financial statements.
Revenue Recognition
Revenues are recorded when: (i) a contract with a client has been identified, (ii) the performance obligation(s) in the contract have been identified, (iii) the transaction price has been determined, (iv) the transaction price has been allocated to each performance obligation in the contract, and (v) the Company has satisfied the applicable performance obligation.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue Recognition (Continued)
The Company's revenue consists of fees from franchised restaurants operated by conventional franchisees. Revenue from conventional franchised restaurants include initial franchise fees, royalties based on percent of sales, marketing fees based on percent of sales, and development fees for locations the franchisee opens in addition to the initial location.
Royalties are collected on a weekly basis and are based on certain percentage as specified on the franchise agreement. Marketing fees are based on up to 1% of gross revenue. The marketing fund is used for marketing expenses related to maximizing public recognition of the Company's brand and marketing fund.
The initial franchise fees collected are determined on a franchisee-by-franchisee basis. The Company had ten franchisees under contract and four were operational as of December 31, 2023.
The Company had no contract assets and approximately $145,000 of contract liabilities as of December 31, 2022.
Advertising
The Company expenses advertising costs as incurred.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 43)
What This Means (2024 FDD)
According to Better Blend's 2024 Franchise Disclosure Document, the company recognizes revenue only after satisfying its performance obligations. Better Blend records revenues when a contract is identified, the performance obligations are identified, the transaction price is determined and allocated, and the company has satisfied the performance obligation. This approach aligns with standard accounting practices, ensuring that revenue is recognized when it is earned.
For Better Blend, revenue primarily comes from fees from franchised restaurants, including initial franchise fees, royalties based on a percentage of sales, marketing fees (also based on a percentage of sales, up to 1% of gross revenue), and development fees for additional locations opened by franchisees. Royalties are collected weekly, based on percentages specified in the franchise agreement. The marketing fund, supported by the marketing fees, is used for marketing expenses to enhance the brand's public recognition.
Better Blend also uses a system of deferred revenue, representing unearned revenue from new franchise sales and approvals of new franchisee locations. Franchise and development fee revenues are recognized only when the performance obligations are met. Specifically, Better Blend recognizes franchise fees over the term of the franchise agreement, indicating that the revenue is earned gradually as the franchisee operates under the Better Blend brand. As of December 31, 2022, Better Blend had approximately $145,000 in contract liabilities, reflecting these deferred revenues.