Does Carbones Pizzeria recognize revenue immediately upon receiving franchise fees?
Carbones_Pizzeria Franchise · 2025 FDDAnswer from 2025 FDD Document
te the transaction price to the performance obligations in the contract; and
- Recognize revenue when (or as) the Company satisfies a performance obligation.
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.
Source: Item 22 — CONTRACTS (FDD page 30)
What This Means (2025 FDD)
According to Carbones Pizzeria's 2025 Franchise Disclosure Document, the company does not recognize initial and renewal franchise fees immediately as revenue. Instead, these fees are treated as deferred revenue. This means that when a new franchise agreement is signed or a location begins operations, Carbones Pizzeria records the franchise fee as deferred revenue on its balance sheet.
The deferred revenue is then recognized as revenue on a pro-rata basis over the term of the franchise agreement. For initial franchise agreements, the term is typically 10 years, starting from when the restaurant opens or twelve months after the franchise agreement is signed, whichever comes first. Similarly, for franchise renewal agreements, the revenue is recognized over their 10-year term.
This accounting practice reflects the fact that Carbones Pizzeria provides ongoing services and support to franchisees throughout the term of the agreement, such as site selection assistance, training, and quality control program implementation. By recognizing the franchise fees over time, the company matches the revenue with the services provided, which is a standard accounting practice. This approach ensures that the revenue recognition aligns with the delivery of services and the franchisee's use of the Carbones Pizzeria name and menu over the life of the agreement.