How does Chocolate Fish Coffee account for pre-opening activities that are not brand specific?
Chocolate_Fish_Coffee 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 41)
What This Means (2024 FDD)
According to Chocolate Fish Coffee's 2024 Franchise Disclosure Document, the company uses an adjusted market assessment approach to determine the stand-alone selling price of pre-opening activities that are not brand specific. Chocolate Fish Coffee first allocates the initial franchise fees and any fixed consideration under the franchise agreement to the stand-alone selling price of training services that are not brand specific. Any remaining amount is then allocated to the right to access Chocolate Fish Coffee's intellectual property.
Consideration allocated to pre-opening activities that are not brand specific is recognized ratably as those services are rendered. This means that as Chocolate Fish Coffee provides these general business training services, they recognize the revenue proportionally over the service period. Chocolate Fish Coffee follows Accounting Standards Update (ASU) to ASC 606, Franchisors—'Revenue from Contracts with Customers (Subtopic 952-606): Practical Expedient', recognizing revenue when the related services have been provided.
The remaining portion of the franchisee fee that is not allocated to these pre-opening activities is recorded as Unearned Revenue. This Unearned Revenue is then recognized over the term of the franchise agreement. This accounting method ensures that Chocolate Fish Coffee recognizes revenue appropriately as they fulfill their obligations to the franchisee, separating out the general business training from the ongoing rights and services provided under the franchise agreement.