What is the effect of Accounting Standards Update 2014-09 on Carbones Pizzeria's revenue recognition?
Carbones_Pizzeria Franchise · 2025 FDDAnswer from 2025 FDD Document
Effective November 1, 2019, the Company adopted Accounting Standards Update ("ASU") 2014-09 (Topic 606): Revenue from Contracts with Customers. This ASU supersedes the revenue recognition requirements in Topic 605 Revenue Recognition (Topic 605). The core principle of Topic 606 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve this core principle, the guidance provides that an entity should apply the following steps: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when or as the entity satisfies a performance obligation. Topic 606 applies to all contracts with customers, except those that are within the scope of other topics within the Financial Accounting Standards Board's ("FASB") Accounting Standards Codification ("ASC"). The ASU requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and estimates, and changes in those estimates.
The Company adopted the standard utilizing the modified retrospective method of transition and elected the practical expedient to apply the revenue standard only to contracts that were not completed as of the adoption date. The results for periods prior to November 1, 2019 were not adjusted for the new standard, and there was no cumulative effect for the change in accounting at the date of adoption.
Source: Item 22 — CONTRACTS (FDD page 30)
What This Means (2025 FDD)
According to Carbones Pizzeria's 2025 Franchise Disclosure Document, the company adopted Accounting Standards Update (ASU) 2014-09 (Topic 606), titled "Revenue from Contracts with Customers," effective November 1, 2019. This ASU supersedes the previous revenue recognition requirements outlined in Topic 605. The core principle of Topic 606 is to recognize revenue when promised goods or services are transferred to customers, reflecting the consideration the company expects to receive in exchange for those goods or services.
To achieve this principle, Carbones Pizzeria follows a five-step process: (1) identifying the contract with the customer, (2) identifying the performance obligations within the contract, (3) determining the transaction price, (4) allocating the transaction price to the performance obligations, and (5) recognizing revenue as the entity satisfies each performance obligation. Topic 606 applies to all contracts with customers, except those covered by other topics within the Financial Accounting Standards Board's (FASB) Accounting Standards Codification (ASC). The ASU also requires additional disclosures regarding the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments, estimates, and changes in those estimates.
Carbones Pizzeria adopted the standard using the modified retrospective method, applying it only to contracts not completed as of the adoption date. Results for periods before November 1, 2019, were not adjusted, and there was no cumulative effect for the change in accounting at the adoption date. This means that the financial statements before this date were not restated to reflect the new standard, providing a consistent basis for comparison going forward. For a franchisee, this change primarily affects how the franchisor recognizes revenue from various sources, such as royalties and franchise fees, which can impact the reported financial performance of the franchisor.