What is the difference between the treatment of brand-specific and non-brand-specific pre-opening activities for Chocolate Bash?
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.
The remaining franchisee fee not allocated to pre-opening activities are recorded as Unearned Revenue and will be recognized over the term of the franchise agreement.
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 brand-specific and non-brand-specific pre-opening activities in its accounting practices. The core of Chocolate Bash's franchise agreement involves granting rights to its intellectual property, alongside pre-opening activities like initial training. These activities are generally treated as a single performance obligation. However, Chocolate Bash recognizes that some pre-opening activities aren't directly tied to the brand and offer general business knowledge. These activities are considered distinct because they benefit the franchisee independently and aren't heavily reliant on Chocolate Bash's specific intellectual property.
For accounting purposes, Chocolate Bash treats these non-brand-specific pre-opening activities as separate performance obligations. The company determines the stand-alone selling price of these activities using an adjusted market assessment approach. The initial franchise fees and any fixed payments under the franchise agreement are allocated first to the stand-alone selling price of the training services that are not brand specific. Any remaining amount is then allocated to the right to access Chocolate Bash's intellectual property.
The revenue recognition differs between the two types of activities. The consideration allocated to pre-opening activities that are not brand-specific is recognized ratably as those services are delivered. For other pre-opening activities, the revenue is recognized when the related services have been rendered, following specific accounting standards. The remaining portion of the franchisee fee, which isn't allocated to these pre-opening activities, is recorded as Unearned Revenue and is recognized over the duration of the franchise agreement.