How does Chocolate Bash handle revenue recognition compared to invoicing timing?

According to Chocolate Bash's 2024 Franchise Disclosure Document, the company's timing of revenue recognition may differ from when they invoice their customers. Chocolate Bash records accounts receivable when revenue is recognized before invoicing. Conversely, they record unearned revenue when revenue is recognized after invoicing. This approach ensures that Chocolate Bash's financial statements accurately reflect when revenue is earned, regardless of when the invoice is sent or paid. These receivables are reported at net realizable value.

For a prospective Chocolate Bash franchisee, this means that the fees they pay to Chocolate Bash, such as initial franchise fees, royalty fees, brand development contributions, and training fees, may not be recognized as revenue by Chocolate Bash at the exact moment the franchisee is invoiced. Instead, Chocolate Bash recognizes revenue based on when they have fulfilled their obligations, such as providing training or granting access to their intellectual property. This could impact Chocolate Bash's reported revenue in any given period.

Chocolate Bash primarily derives revenues from franchise fees, both one-time and recurring monthly fees. Chocolate Bash recognizes revenue when there is persuasive evidence of an arrangement, delivery has occurred, or services have been rendered, the price is fixed or determinable, and collectability is reasonably assured. The determination of whether fees are fixed or determinable and collection is reasonably assured involves assumptions. Arrangement terms and customer information are evaluated to ensure that these criteria are met before recognizing revenue.

Chocolate Bash has elected to adopt the new standard for franchisors, which allows them to account for pre-opening services provided to a franchisee as distinct from the franchise license if the services are consistent with those included in a predefined list within the guidance. Consideration allocated to pre-opening activities, which are not brand specific, are recognized ratably as those services are rendered. The remaining franchisee fee not allocated to pre-opening activities is recorded as Unearned Revenue and will be recognized over the term of the franchise agreement.