When recognizing revenue for Carbones Pizzeria, what triggers the recognition of revenue?
Carbones_Pizzeria Franchise · 2025 FDDAnswer from 2025 FDD Document
easehold improvements | 15-39 |
Notes to Consolidated Financial Statements As of and For the Year ended October 31, 2022
A. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue Recognition
Revenue is recognized when control of the promised products or services are transferred to the Company's customers, in an amount that reflects the consideration the Company expects to be entitled to for those products and services. In general, the Company determines revenue recognition through the following steps:
- · Identification of the contract, or contracts, with customers;
- · Identification of the performance obligation(s) in the contract;
- · determination of the contract price;
- · Allocation of the transaction price to the performance obligations in the contract;
- · Recognition of revenue when, or as, the Company satisfies a performance obligation.
The following policies apply to the Company's major categories of revenue transactions:
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. The contract term for the initial franchise agreements is 10 years commencing on the earlier of the date when the restaurant opens or twelve months following the date the franchise agreement was signed. During that time the franchisee is allowed to use the Carbone's Pizzeria name and menu. When the franchise agreement expires, the franchise may pay an additional franchise fee to renew the agreement. The contract term for franchise renewal agreements is 10 years.
Source: Item 22 — CONTRACTS (FDD page 30)
What This Means (2025 FDD)
According to Carbones Pizzeria's 2025 Franchise Disclosure Document, revenue recognition occurs when control of the promised products or services is transferred to the company's customers, reflecting the consideration the company expects to receive for those products and services. Carbones Pizzeria determines revenue recognition through a series of steps including identifying the contract, identifying performance obligations, determining the contract price, allocating the transaction price to performance obligations, and recognizing revenue when a performance obligation is satisfied.
For royalties, Carbones Pizzeria recognizes revenue each week based on a percentage of reported franchisee sales. This means that as franchisees make sales, a portion of those sales is remitted to the company as royalties, which is then recognized as revenue. For company-owned restaurants, revenue is recognized at the time of sale.
Initial and renewal franchise fees are recognized over the contractual term of the franchise agreement, which is typically 10 years. This means that the revenue from these fees is not recognized immediately but is spread out over the duration of the agreement. This approach reflects the ongoing rights and services provided to the franchisee during that period, such as the use of the Carbone's Pizzeria name and menu.
Franchise fees are recognized as deferred revenue when a franchise agreement is executed or when a location commences operations. 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 and 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.