What happens if a Carbones Pizzeria location commences operations before the franchise agreement is executed?
Carbones_Pizzeria Franchise · 2025 FDDAnswer from 2025 FDD Document
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.
Source: Item 22 — CONTRACTS (FDD page 30)
What This Means (2025 FDD)
According to Carbones Pizzeria's 2025 Franchise Disclosure Document, franchise fees are recognized as deferred revenue when a franchise agreement is executed or when a location begins operations. The deferred revenue is then recognized as revenue pro-rata over the term of the agreement.
This means that Carbones Pizzeria recognizes the initial franchise fee as revenue over the life of the franchise agreement, which is typically 10 years. Whether the agreement is signed before or after the restaurant opens, the revenue recognition process remains the same. The initial franchise fees are considered highly dependent upon and interrelated with the franchise right granted in the franchise agreement.
For a prospective Carbones Pizzeria franchisee, this accounting practice has no direct impact on day-to-day operations. However, it's important to understand how the franchisor recognizes revenue, as it can affect the franchisor's financial statements and overall financial health. Franchisees should ensure that the franchise agreement clearly outlines the terms and conditions, regardless of when the restaurant commences operations relative to the agreement's execution.