To which contracts does Topic 606 apply for Carbones Pizzeria?
Carbones_Pizzeria Franchise · 2025 FDDAnswer from 2025 FDD Document
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.
Source: Item 22 — CONTRACTS (FDD page 30)
What This Means (2025 FDD)
According to Carbones Pizzeria's 2025 Franchise Disclosure Document, Topic 606 applies to contracts with customers where revenue is recognized when control of promised products or services is transferred, reflecting the consideration the company expects to receive. This involves identifying the contract, performance obligations, determining the contract price, allocating the price to obligations, and recognizing revenue as obligations are met.
For Carbones Pizzeria, this specifically applies to royalties, which are service fees based on a percentage of sales from franchised locations, recognized weekly. It also applies to initial and renewal franchise fees, which cover services like site selection, training, accounting system implementation, and quality control program design. These fees are recognized over the 10-year contractual term of the franchise agreement, starting when the restaurant opens or twelve months after signing the agreement.
In simpler terms, Topic 606 impacts how Carbones Pizzeria accounts for and reports revenue from both ongoing royalties paid by franchisees and the initial fees franchisees pay to join the system. This accounting standard ensures that revenue is recognized when Carbones Pizzeria has fulfilled its obligations under the franchise agreement, such as providing the right to use the brand name and offering support services.