When does Chocolate Bash recognize consideration allocated to pre-opening activities included under Accounting Standards Update (ASU) to ASC 606 for Chocolate Bash franchisees?

According to Chocolate Bash's 2024 Franchise Disclosure Document, the company recognizes consideration allocated to pre-opening activities, which are not brand specific, ratably as those services are rendered. For pre-opening activities included under Accounting Standards Update (ASU) to ASC 606, Franchisors—'Revenue from Contracts with Customers (Subtopic 952-606): Practical Expedient', Chocolate Bash recognizes revenue when the related services have been rendered.

This means that Chocolate Bash accounts for revenue related to pre-opening activities in two ways. If the pre-opening activities are not specific to the Chocolate Bash brand, the revenue is recognized gradually as these services are provided to the franchisee. However, if the pre-opening activities fall under the ASU to ASC 606 guidelines, the revenue is recognized at the specific point in time when those services are completed.

For a prospective Chocolate Bash franchisee, this accounting practice affects how the initial franchise fee is allocated and recognized as revenue by the franchisor. A portion of the initial franchise fee is allocated to pre-opening activities. The portion allocated to brand-specific pre-opening activities is recognized over the term of the franchise agreement. The portion allocated to non-brand-specific pre-opening activities is recognized as the services are rendered. This distinction is important for Chocolate Bash's financial reporting and may also provide insight into the types of support and training franchisees receive before opening their location.