How does Capriottis Sandwich Shop account for pre-opening activities?
Capriottis_Sandwich_Shop Franchise · 2025 FDDAnswer from 2025 FDD Document
The Company's franchise agreements include (a) the right to use the Company's symbolic intellectual property over the term of each franchise agreement (Franchise Right), (b) pre-opening services, such as training and (c) ongoing services, such as management of the advertising fund contributions, development of training materials and menu items and restaurant monitoring.
The accounting standards created a practical expedient that simplifies the identification of performance obligations for private company franchisors for certain pre-opening services. If the practical expedient is elected, the pre-opening services provided by a franchisor to a franchisee can be accounted for as a single performance obligation, distinct from the franchise license. Pre-opening services per accounting standards are defined as follows:
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- Assistance in the selection of a site.
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- Assistance in obtaining facilities and preparing the facilities for their intended use, including related financing, architectural, and engineering services, and lease negotiation.
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- Training of the franchisee's personnel or the franchisee.
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- Preparation and distribution of manuals and similar material concerning operations, administration, and record keeping.
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- Bookkeeping, information technology, and advisory services, including setting up the franchisee's records and advising the franchisee about income, real estate, and other taxes or about regulations affecting the franchisee's business.
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- Inspection, testing, and other quality control programs.
The Company elected to apply the practical expedient allowed by the accounting standards and has elected to account for all qualifying pre-opening activities as a single performance obligation.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 73)
What This Means (2025 FDD)
According to the 2025 FDD, Capriottis Sandwich Shop franchise agreements include the right to use their intellectual property, pre-opening services like training, and ongoing services such as advertising fund management, training material development, menu item creation, and restaurant monitoring.
Capriottis Sandwich Shop utilizes a practical accounting expedient, allowed by accounting standards for private company franchisors, to simplify the identification of performance obligations related to pre-opening services. By electing this expedient, Capriottis Sandwich Shop accounts for all qualifying pre-opening activities as a single performance obligation, separate from the franchise license itself. These pre-opening services include site selection assistance, help in obtaining and preparing facilities (including financing, architectural, engineering, and lease negotiation), personnel training, preparation and distribution of operations manuals, bookkeeping and IT services, and quality control programs.
This approach means that instead of recognizing revenue for each individual pre-opening service as it is completed, Capriottis Sandwich Shop recognizes the revenue for all these services together as one single obligation. For a prospective franchisee, this accounting treatment primarily affects how Capriottis Sandwich Shop recognizes revenue and may not have a direct impact on the franchisee's operations or fees. However, it provides insight into how the franchisor values and accounts for the initial support and training provided to new franchisees.