How does Chocolate Fish Coffee determine if pre-opening activities are highly interrelated or interdependent?
Chocolate_Fish_Coffee Franchise · 2024 FDDAnswer from 2024 FDD Document
The Company's primarily performance obligation under the franchise agreement mainly includes granting certain rights to access the Company's intellectual property and a variety of activities relating to opening a franchise unit, including initial training and other such activities commonly referred to collectively as "pre-opening activities", which are recognized as a single performance obligation. The Company expects that certain pre-opening activities provided to the franchisee will not be brand specific and will provide the franchisee with relevant general business information that is separate and distinct from the operation of a company-branded franchise unit. The portion of pre-opening activities that will be provided that is not brand specific is expected to be distinct as it will provide a benefit to the franchisee and is expected not to be highly interrelated or interdependent to the access of the Company's intellectual property, and therefore will be accounted for as a separate distinct performance obligation. All other pre-opening activities are expected to be highly interrelated and interdependent to the access of the Company's intellectual property and therefore will be accounted for as a single performance obligation, which is satisfied by granting certain rights to access the Company's intellectual property over the term of each 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 distinguishes between pre-opening activities that are brand-specific and those that are not when determining revenue recognition. Chocolate Fish Coffee considers pre-opening activities that are not brand specific to be separate and distinct if they provide general business information relevant to the franchisee, independent of the Chocolate Fish Coffee brand.
Chocolate Fish Coffee expects that these non-brand-specific activities will benefit the franchisee and will not be highly interrelated or interdependent with access to the company's intellectual property. Therefore, these activities are accounted for as a separate performance obligation.
Conversely, all other pre-opening activities are considered highly interrelated and interdependent with access to Chocolate Fish Coffee's intellectual property. These activities are treated as a single performance obligation, which is satisfied by granting rights to access the company's intellectual property over the term of the franchise agreement. This means that the revenue from these activities is recognized over the life of the franchise agreement, rather than at the time the services are rendered.