How does Chocolate Bash account for pre-opening activities that are not brand specific?
Chocolate_Bash Franchise · 2024 FDDAnswer from 2024 FDD Document
The Company's primarily performance obligation under the franchise agreement mainly includes granting certain rights to access the Company's intellectual property and a variety of activities relating to opening a franchise unit, including initial training and other such activities commonly referred to collectively as "pre-opening activities", which are recognized as a single performance obligation. The Company expects that certain pre-opening activities provided to the franchisee will not be brand specific and will provide the franchisee with relevant general business information that is separate and distinct from the operation of a company-branded franchise unit. The portion of pre-opening activities that will be provided that is not brand specific is expected to be distinct as it will provide a benefit to the franchisee and is expected not to be highly interrelated or interdependent to the access of the Company's intellectual property, and therefore will be accounted for as a separate distinct performance obligation. All other pre-opening activities are expected to be highly interrelated and interdependent to the access of the Company's intellectual property and therefore will be accounted for as a single performance obligation, which is satisfied by granting certain rights to access the Company's intellectual property over the term of each franchise agreement.
The Company estimates the stand-alone selling price of pre-opening activities using an adjusted market assessment approach. The Company will first allocate the initial franchise fees and the fixed consideration, under the franchise agreement to the standalone selling price of the training services that are not brand specific and the residual, if any, to the right to access the Company's intellectual property. Consideration allocated to pre-opening activities, which are not brand specific are recognized ratably as those services are rendered. Consideration allocated to pre-opening activities included under Accounting Standards Update (ASU) to ASC 606, Franchisors—'Revenue from Contracts with Customers (Subtopic 952-606): Practical Expedient' is recognized when the related services have been rendered.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 38)
What This Means (2024 FDD)
According to Chocolate Bash's 2024 Franchise Disclosure Document, the company distinguishes between pre-opening activities that are brand-specific and those that are not. Chocolate Bash recognizes that some pre-opening activities provide franchisees with general business information that is separate and distinct from the operation of a Chocolate Bash franchise.
Chocolate Bash accounts for these non-brand-specific pre-opening activities as a separate performance obligation. This means that the revenue associated with these activities is recognized ratably as the services are rendered. The company estimates the stand-alone selling price of these activities using an adjusted market assessment approach, allocating a portion of the initial franchise fees to these services. Any remaining amount is then allocated to the right to access Chocolate Bash's intellectual property.
For a prospective franchisee, this accounting treatment means that a portion of the initial franchise fee covers general business training and support, which is recognized as Chocolate Bash provides these services. The remaining portion of the franchise fee, which is allocated to the brand-specific aspects of the franchise, is recognized over the term of the franchise agreement. This approach ensures that Chocolate Bash's financial statements accurately reflect the value of the different services and rights provided to franchisees.