How does Chocolate Fish Coffee allocate the initial franchise fees and fixed consideration?
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 the 2024 Franchise Disclosure Document, Chocolate Fish Coffee uses an adjusted market assessment approach to determine the stand-alone selling price of pre-opening activities. The initial franchise fees and fixed consideration are allocated to the training services that are not brand specific. Any residual 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 as revenue ratably as those services are rendered. For pre-opening activities included under Accounting Standards Update (ASU) to ASC 606, revenue is recognized when the related services have been rendered. The remaining portion of the franchisee fee that is not allocated to pre-opening activities is recorded as Unearned Revenue and is recognized over the term of the franchise agreement.
For a prospective Chocolate Fish Coffee franchisee, this means that the initial franchise fee covers both training and access to the company's intellectual property. The portion of the fee allocated to training is recognized as Chocolate Fish Coffee provides those services, while the remaining portion is recognized over the life of the franchise agreement. This accounting method ensures that Chocolate Fish Coffee recognizes revenue in accordance with accounting standards and reflects the value provided to the franchisee over time.