Why are some pre-opening activities considered distinct performance obligations by Chocolate Fish Coffee?
Chocolate_Fish_Coffee Franchise · 2024 FDDAnswer from 2024 FDD Document
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, certain pre-opening activities are considered distinct performance obligations because they are not brand-specific and provide franchisees with general business information separate from the Chocolate Fish Coffee franchise operation. These activities benefit the franchisee independently and are not highly interrelated or interdependent with access to Chocolate Fish Coffee's intellectual property.
Chocolate Fish Coffee accounts for these distinct pre-opening activities separately from the franchise license. The company uses an adjusted market assessment approach to estimate the stand-alone selling price of these activities. Chocolate Fish Coffee allocates the initial franchise fees and fixed consideration under the franchise agreement to the stand-alone 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.
The consideration allocated to these non-brand-specific pre-opening activities is recognized ratably as the services are rendered. The remaining franchisee fee not allocated to these activities is recorded as unearned revenue and is recognized over the term of the franchise agreement. This accounting treatment reflects the fact that these activities provide a separate benefit to the franchisee and are not integral to the ongoing use of the Chocolate Fish Coffee brand and intellectual property.