How does Carbones Pizzeria allocate the transaction price to performance obligations?

According to Carbones Pizzeria's 2025 Franchise Disclosure Document, the company uses a five-step process to recognize revenue from contracts with customers. The fourth step involves allocating the transaction price to the performance obligations in the contract. This allocation is a key part of determining how and when Carbones Pizzeria recognizes revenue.

Specifically, Carbones Pizzeria assesses the products or services promised in contracts with customers at the beginning of the contract to determine the appropriate amount at which to record revenue, which is referred to as a performance obligation. Revenue is recognized when control of the promised products or services is transferred to customers at an amount that reflects the consideration to which the entity expects to be entitled in exchange for the products or services.

For a potential Carbones Pizzeria franchisee, understanding this allocation process is crucial. It dictates how the initial franchise fee and ongoing royalties are accounted for. The initial franchise fees are recognized over the contractual term of the franchise agreement, which is typically 10 years. This means that Carbones Pizzeria doesn't recognize the entire initial fee upfront but spreads it out over the life of the agreement. This approach is common in franchising, as the initial fee often covers ongoing support and the right to use the brand's name and system.