What is the relationship between the initial franchise fee and the unearned revenue for a Chocolate Bash franchise?
Chocolate_Bash Franchise · 2024 FDDAnswer from 2024 FDD Document
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 the 2024 Chocolate Bash FDD, the initial franchise fee paid by a franchisee is allocated to several components, including pre-opening activities and the right to access Chocolate Bash's intellectual property. The portion of the initial franchise fee allocated to pre-opening activities that are not brand-specific is recognized as revenue ratably as those services are rendered. 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 portion of the initial franchise fee, after deducting the amounts allocated to pre-opening activities, is recorded as unearned revenue. This unearned revenue represents the consideration for granting the franchisee the right to access Chocolate Bash's intellectual property over the term of the franchise agreement. As the franchisee operates the business over the term of the agreement, Chocolate Bash recognizes a portion of this unearned revenue as earned revenue.
In essence, the initial franchise fee is the upfront payment, a portion of which is immediately recognized as revenue for specific services, while the remaining portion is deferred as unearned revenue and recognized over the life of the franchise agreement. This accounting treatment reflects the ongoing rights and services Chocolate Bash provides to the franchisee throughout the franchise term. The balance sheet as of December 31, 2023, shows deferred revenue (both current and non-current portions) totaling $58,875, and $33,979 as of December 31, 2022.