How does Capriottis Sandwich Shop account for pre-opening services provided to franchisees?
Capriottis_Sandwich_Shop Franchise · 2025 FDDAnswer from 2025 FDD Document
mounts under the net method in the consolidated statements of operations. Accordingly, these taxes are not included in gross revenue.
Franchise Agreements
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 recordkeeping.
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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.
Recognition of initial franchise fees is deferred and recognized at a point in time when the pre-opening services have been provided to the franchisees and upon the store opening. In the event a franchise agreement is terminated, any remaining deferred fees are recognized in the period of termination. The Company also records sales of gift certificates as deferred revenue.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 73)
What This Means (2025 FDD)
According to the 2025 FDD, Capriottis Sandwich Shop utilizes a practical accounting expedient that allows them to treat all qualifying pre-opening activities as a single performance obligation. This means that instead of recognizing revenue for each individual service provided during the pre-opening phase, such as site selection assistance or training, they account for all these services collectively.
The FDD specifies several pre-opening services that qualify under this expedient. These include assistance with site selection, help in obtaining and preparing facilities (including financing, architectural services, and lease negotiation), training of personnel, preparation and distribution of operational manuals, bookkeeping and IT support, advisory services related to taxes and regulations, and quality control programs.
Capriottis Sandwich Shop defers recognition of the initial franchise fees and recognizes them at a specific point in time. This point occurs when the pre-opening services have been provided to the franchisees and specifically upon the store opening. If a franchise agreement is terminated before this point, any remaining deferred fees are recognized during the termination period. This approach also applies to sales of gift certificates, which are recorded as deferred revenue until they are redeemed. This accounting method ensures that revenue is recognized only after Capriottis Sandwich Shop has fulfilled its obligations to the franchisee during the pre-opening phase.