How does Carbones Pizzeria recognize the initial and renewal franchise fees?
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, the company recognizes initial and renewal franchise fees over the contractual term of the franchise agreement. When a franchise is sold, Carbones Pizzeria agrees to provide services such as site selection assistance, personnel training, accounting system implementation, and quality control program design.
The FDD states that Carbones Pizzeria considers these initial and renewal franchise fees 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 either when the restaurant opens or twelve months after the franchise agreement is signed, whichever is earlier. During this period, the franchisee can use the Carbone's Pizzeria name and menu.
When the initial franchise agreement expires, a franchisee may pay an additional fee to renew the agreement, which also has a contract term of 10 years. Franchise fees are recorded as deferred revenue when the franchise agreement is executed or when the location begins operations. This deferred revenue is then recognized pro-rata over the term of the agreement. This accounting practice ensures that revenue recognition aligns with the service provided over the life of the franchise agreement.