What is the practical expedient mentioned in the context of Chocolate Fish Coffee's revenue recognition?

According to Chocolate Fish Coffee's 2024 Franchise Disclosure Document, the Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU) to ASC 606, Franchisors—'Revenue from Contracts with Customers (Subtopic 952-606): Practical Expedient' in 2022. This update provides a practical expedient that allows private company franchisors to account for preopening services provided to a franchisee as distinct from the franchise license if the services are consistent with those included in a predefined list within the guidance. Chocolate Fish Coffee has elected to adopt this new standard. This means that Chocolate Fish Coffee can treat certain pre-opening services differently for revenue recognition purposes.

Chocolate Fish Coffee considers its primary performance obligation under the franchise agreement to be granting rights to access their intellectual property and performing pre-opening activities such as initial training. The company distinguishes between pre-opening activities that are brand-specific and those that provide general business information. The portion of pre-opening activities 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.

Chocolate Fish Coffee estimates the stand-alone selling price of pre-opening activities using an adjusted market assessment approach. The company allocates the initial franchise fees and fixed consideration under the franchise agreement to the standalone selling price of the training services that are not brand specific, with any residual amount allocated 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. This accounting treatment could impact the timing of revenue recognition for Chocolate Fish Coffee, potentially affecting the financial statements presented to prospective franchisees.