What revenue recognition model does Casiola utilize for franchise fees?
Casiola Franchise · 2024 FDDAnswer from 2024 FDD Document
ligations. The nature of the Company's promise in granting the franchise license is to provide the franchise owner with access to the brand's intellectual property over the term of the franchise arrangement.
The transaction price in a standard franchise arrangement consists of (a) franchise/development fees; (b) Marketing, brand development and royalties Fees and (c) IT Fees; (d) Annual Conference Fees. The Company utilize ASC 606 five-stops revenue recognition model as follows:
- · Identify the contract with the customer.
- Identify the performance obligation in the contract.
- Determine the transaction price.
- Allocate the transaction price to the performance obligations.
- · Recognize revenue when (or as) each performance obligation is satisfied.
The terms of the Company's franchise agreement will be as follows:
- The Company will grant the right to use the Company name, trademark, and system in the franchisee's franchise development business.
- The franchisee is obligated to pay a non-refundable initial franchise fee.
- The franchisee is obligated to pay per transaction royalties, marketing, IT, and annual conference fees. Certain\nother fees are also outlined in the agreement.
Franchise revenues are recognized by the Company from the following different sources: The Company recognizes franchise fees as two (2) performance obligations. The first, pre-opening services, including access to manuals, assistance in site selection, and initial training, have been determined to be distinct services offered to franchisees. Pre-opening services are earned over a period using an input method of completion based on costs incurred for each franchisee at the end of each year.
The second, access to the franchise license, has been determined to be distinct. The amount allocated to the franchise license is earned over time as performance obligations are satisfied due to the continuous transfer of control to the franchisee. Franchise and development fees are paid in advance of the franchise opening, typically when entering into a new franchise or development agreement. Fees allocated to the franchise license are recognized as revenue on a
straight-line basis over the term of each respective franchise agreement. Initial franchise agreement terms are typically 5 years while successive agreement terms are typically 5 years.
Variable Considerations
Franchise agreements contain variable considerations in the form of royalty fees and brand development (advertising). These fees are based on franchisee sales and are recorded as revenue and recognized as these services are delivered because the variable payment relates specifically to the performance obligation of using the license.
Source: Item 23 — RECEIPTS (FDD pages 47–209)
What This Means (2024 FDD)
According to the 2024 Casiola Franchise Disclosure Document, Casiola adheres to the ASC 606 five-step revenue recognition model for franchise fees. This model involves: identifying the contract with the customer, identifying the performance obligations within the contract, determining the transaction price, allocating the transaction price to the performance obligations, and recognizing revenue as each performance obligation is satisfied.
Casiola recognizes franchise fees as two performance obligations: pre-opening services and access to the franchise license. Pre-opening services, such as access to manuals, site selection assistance, and initial training, are considered distinct services and are earned over a period using an input method based on costs incurred for each franchisee at the end of each year. The access to the franchise license is also considered distinct, and the amount allocated to the franchise license is earned over time as performance obligations are satisfied through the continuous transfer of control to the franchisee.
Franchise and development fees are typically paid in advance of the franchise opening, usually when entering into a new agreement. Fees allocated to the franchise license are recognized as revenue on a straight-line basis over the term of each franchise agreement. Initial franchise agreement terms are typically 5 years, with successive agreement terms also typically being 5 years.
The franchise agreements also include variable considerations in the form of royalty fees and brand development (advertising) fees. These fees are based on franchisee sales and are recorded as revenue and recognized as these services are delivered, as the variable payment relates specifically to the performance obligation of using the license.