What is considered a performance obligation for Carbones Pizzeria?
Carbones_Pizzeria Franchise · 2025 FDDAnswer from 2025 FDD Document
easehold improvements | 15-39 |
Notes to Consolidated Financial Statements As of and For the Year ended October 31, 2022
A. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue Recognition
Revenue is recognized when control of the promised products or services are transferred to the Company's customers, in an amount that reflects the consideration the Company expects to be entitled to for those products and services. In general, the Company determines revenue recognition through the following steps:
- · Identification of the contract, or contracts, with customers;
- · Identification of the performance obligation(s) in the contract;
- · determination of the contract price;
- · Allocation of the transaction price to the performance obligations in the contract;
- · Recognition of revenue when, or as, the Company satisfies a performance obligation.
The following policies apply to the Company's major categories of revenue transactions:
Royalties
The Company receives a service fee based on a percentage of sales each week from the franchised locations as royalties. Revenue from royalties is recognized each week based on a percentage of reported franchisee sales.
Initial and Renewal Franchise Fees
When an individual franchise is sold, the Company agrees to provide certain services to the franchisee. Generally, these services include assistance in site selection, training personnel, implementation of an accounting system, and design of a quality control program. The Company's initial and renewal franchise fees are considered highly dependent upon and interrelated with the franchise right granted in the franchise agreement. As such, these franchise fees are recognized over the contractual term of the franchise agreement. The contract term for the initial franchise agreements is 10 years commencing on the earlier of the date when the restaurant opens or twelve months following the date the franchise agreement was signed. During that time the franchisee is allowed to use the Carbone's Pizzeria name and menu. When the franchise agreement expires, the franchise may pay an additional franchise fee to renew the agreement. The contract term for franchise renewal agreements is 10 years. There were no initial and renewal franchise fees in the year ended October 31, 2022.
Notes to Consolidated Financial Statements As of and For the Year ended October 31, 2022
A. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONTINUED
Revenue recognition (Continued)
Company Restaurant Sales
The Company earns revenue from sales at the Company owned restaurant and is recognized at the time of sale.
Source: Item 22 — CONTRACTS (FDD page 30)
What This Means (2025 FDD)
According to Carbones Pizzeria's 2025 Franchise Disclosure Document, a performance obligation arises when the company promises to transfer products or services to customers and revenue is recognized when these obligations are satisfied. For Carbones Pizzeria, this includes several key areas.
Specifically, when a new franchise is sold, Carbones Pizzeria commits to providing services such as site selection assistance, personnel training, setting up an accounting system, and designing a quality control program. The initial and renewal franchise fees are closely tied to the franchise rights granted in the franchise agreement. As such, Carbones Pizzeria recognizes these franchise fees over the contractual term of the agreement, which is typically 10 years. This period starts either when the restaurant opens or twelve months after the franchise agreement is signed, during which the franchisee can use the Carbone's Pizzeria name and menu.
Royalties also represent a performance obligation. Carbones Pizzeria receives a service fee, calculated as a percentage of sales, from its franchised locations each week. The revenue from these royalties is recognized weekly, based on the reported sales of the franchisee. Additionally, revenue is earned from sales at company-owned restaurants and is recognized at the time of the sale. Franchisees also contribute royalties to an advertising fund, which is used to increase public recognition of Carbone's Pizzeria. The company expenses advertising costs as they are incurred.