How does Carbones Pizzeria determine the appropriate amount to record revenue?
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.
Advertising
In accordance with signed franchise agreements, franchisees contribute royalties to an advertising fund. The fund is to be used to maximize public recognition of Carbone's Pizzeria.
Advertising costs are expensed as incurred. Advertising and promotion expense is approximately $506,000 for 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, the company recognizes revenue when control of promised products or services is transferred to customers, reflecting the consideration they expect to receive for those products and services. The process involves several steps: identifying the contract with customers, identifying performance obligations within the contract, determining the contract price, allocating the transaction price to the performance obligations, and recognizing revenue as each performance obligation is satisfied. This aligns with standard accounting practices that aim to match revenue recognition with the delivery of goods or services.
For royalties, Carbones Pizzeria recognizes revenue each week based on a percentage of reported franchisee sales. This means that a portion of the sales from each franchised location is remitted to the company as royalties, and this is recorded as revenue on a weekly basis. For company-owned restaurants, revenue is recognized at the time of sale, which is a straightforward approach common in the restaurant industry.
Initial and renewal franchise fees are treated differently. Instead of recognizing these fees immediately, Carbones Pizzeria recognizes them over the contractual term of the franchise agreement, which is typically 10 years. This approach acknowledges that the value of the franchise fee is realized over the life of the agreement, as the franchisee benefits from the Carbone's Pizzeria name, menu, and support services during that period. There were no initial and renewal franchise fees recorded for the years ended October 31, 2022, October 31, 2023, and October 31, 2024.
Franchisees also contribute to an advertising fund, but these contributions are not recognized as revenue for Carbones Pizzeria. Instead, the company expenses advertising costs as they are incurred. For the years ended October 31, 2024, and October 31, 2023, advertising and promotion expenses amounted to $237,855 and $278,545, respectively. For the year ended October 31, 2022, advertising and promotion expense was approximately $506,000. This means that the advertising fund is used to promote the Carbone's Pizzeria brand, and the costs associated with these efforts are recorded as expenses rather than revenue.