What must Carbones Pizzeria do to satisfy a performance obligation?
Carbones_Pizzeria Franchise · 2025 FDDAnswer from 2025 FDD Document
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 promised products or services is transferred to customers. This happens in an amount that reflects the consideration Carbones Pizzeria expects to receive for those products and services. The process involves several steps to determine when a performance obligation is satisfied.
These steps include identifying the contract with customers, identifying the performance obligations within that contract, determining the contract price, allocating the transaction price to the performance obligations, and finally, recognizing revenue when the performance obligation is satisfied. For royalties, which are a major revenue category for Carbones Pizzeria, revenue is recognized each week based on a percentage of reported franchisee sales.
For initial and renewal franchise fees, Carbones Pizzeria agrees to provide services such as site selection assistance, personnel training, accounting system implementation, and quality control program design. Because these services are highly dependent on the franchise right, the associated fees are recognized over the 10-year contractual term of the franchise agreement. This term begins when the restaurant opens or twelve months after the franchise agreement is signed, during which the franchisee can use the Carbone's Pizzeria name and menu. Upon expiration, franchisees may renew the agreement for another 10-year term by paying an additional franchise fee.