How does Chocolate Bash determine if pre-opening activities are 'highly interrelated or interdependent'?
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 when recognizing revenue. Chocolate Bash considers pre-opening activities that are not brand specific to be separate and distinct from the operation of a Chocolate Bash franchise unit.
Specifically, Chocolate Bash expects that certain pre-opening activities will provide franchisees with relevant general business information that is not specific to the Chocolate Bash brand. These activities are considered distinct because they benefit the franchisee independently of the franchise. As such, Chocolate Bash does not consider these activities to be highly interrelated or interdependent with access to the company's intellectual property.
Conversely, all other pre-opening activities are considered highly interrelated and interdependent with access to Chocolate Bash's intellectual property. These activities are therefore accounted for as a single performance obligation, which is satisfied by granting the franchisee certain rights to access the company's intellectual property over the term of the franchise agreement. This means that the revenue from these activities is recognized over the life of the franchise agreement, rather than at the start.
Chocolate Bash estimates the stand-alone selling price of pre-opening activities using an adjusted market assessment approach. The company allocates the initial franchise fees and fixed consideration under the franchise agreement to the standalone selling price of the training services that are not brand specific, with any residual amount allocated to the right to access the company's intellectual property. Consideration allocated to pre-opening activities that are not brand specific is recognized ratably as those services are rendered, while 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.