Over what period does Carbones Pizzeria recognize deferred franchise fee revenue?
Carbones_Pizzeria Franchise · 2025 FDDAnswer from 2025 FDD Document
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 agreement.
Notes to Consolidated Financial Statements For the Year Ended October 31, 2024
2. Summary of Significant Accounting Policies (Continued)
Initial and Renewal Franchise Fees (Continued)
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 initially recorded as deferred revenue when the franchise agreement is executed or when the location begins operations. The deferred revenue is then recognized pro-rata over the term of the agreement.
For initial franchise agreements, the contract term is ten years, starting from the earlier of when the restaurant opens or twelve months after the franchise agreement is signed. During this period, the franchisee is permitted to use the Carbones Pizzeria name and menu. Renewal franchise agreements also have a contract term of ten years.
For area development agreements, the development fees are recorded as deferred revenue when the area development agreement is executed. This 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 comes first. Deferred commissions for franchise sales are recorded at the time of sale and recognized as commission expenses over the term of the franchise agreement.