What is the 'residual' mentioned in the context of allocating initial franchise fees for Chocolate Fish Coffee?
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 'residual' refers to the remaining portion of the initial franchise fee after allocating a portion to training services. Chocolate Fish Coffee uses an adjusted market assessment approach to estimate the stand-alone selling price of pre-opening activities. The initial franchise fees and any fixed consideration under the franchise agreement are allocated to the stand-alone selling price of training services that are not brand-specific.
The residual, if any, is then allocated to the right to access Chocolate Fish Coffee's intellectual property. The consideration allocated to pre-opening activities that are not brand-specific is recognized ratably as those services are rendered. The remaining franchisee fee not allocated to pre-opening activities is recorded as Unearned Revenue and will be recognized over the term of the franchise agreement.
For a prospective franchisee, this means that the initial franchise fee covers both training and the right to use Chocolate Fish Coffee's brand and proprietary information. The portion allocated to training is recognized as revenue as the training is provided, while the remaining portion related to intellectual property access is recognized over the life of the franchise agreement. This accounting treatment affects how Chocolate Fish Coffee recognizes revenue from franchise fees over time.