How are franchise fees recognized by Carbones Pizzeria?
Carbones_Pizzeria Franchise · 2025 FDDAnswer from 2025 FDD Document
action price;
- Allocate the transaction price to the performance obligations in the contract; and
- Recognize revenue when (or as) the Company satisfies a performance obligation.
In accordance with ASU 2014-09, franchise fees are recognized as deferred revenue at the time a franchise agreement is executed or when a location commences operations. The deferred revenue is then recognized as revenue pro-rata over the term of the agreement. For area development agreements, the development fees are recognized as deferred revenue at the time an area development agreement is executed. The deferred revenue is recognized pro-rata over the term of the agreement or when the required number of franchises in the area development agreement are satisfied, whichever occurs earlier.
Deferred commissions for sales of franchises are recorded at the time of sale and recognized as commission expense over the term of the franchise agreement.
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 a
Source: Item 22 — CONTRACTS (FDD page 30)
What This Means (2025 FDD)
According to Carbones Pizzeria's 2025 Franchise Disclosure Document, initial and renewal franchise fees are recognized over the contractual term of the franchise agreement. These fees are considered highly dependent upon and interrelated with the franchise right granted in the franchise agreement. The initial franchise agreement has a contract term of 10 years, commencing on the earlier of the restaurant opening date or twelve months after the franchise agreement is signed.
Specifically, Carbones Pizzeria recognizes franchise fees as deferred revenue when the franchise agreement is executed or when the location begins operations. This deferred revenue is then recognized as revenue on a pro-rata basis over the term of the agreement. For area development agreements, development fees are also recognized as deferred revenue upon execution of the agreement and are recognized pro-rata over the agreement term or when the required number of franchises are established, whichever comes first.
This accounting practice means that Carbones Pizzeria does not recognize the entire franchise fee as revenue immediately upon receipt. Instead, it spreads the recognition of revenue over the life of the franchise agreement, which is typically 10 years. This approach aligns the revenue recognition with the services and rights provided to the franchisee over that period, including site selection assistance, training, accounting system implementation, and quality control program design.
For a prospective Carbones Pizzeria franchisee, this deferred revenue recognition has no direct impact on their operations. However, it is a standard accounting practice that provides a more accurate representation of the franchisor's financial performance by matching revenue with the ongoing services and support provided to franchisees. It also affects how deferred commissions for sales of franchises are recorded, which are recorded at the time of sale and recognized as commission expense over the term of the franchise agreement.