Under what accounting standard does Chop5 Salad Kitchen recognize revenue?
Chop5_Salad_Kitchen Franchise · 2024 FDDAnswer from 2024 FDD Document
The Company recognizes revenue under the guidance of ASC 606 "Contracts with Customers". The Company's revenue will be principally generated through franchise agreements executed with the Company's franchisees.
Each franchise agreement is comprised of several performance obligations. The Company identifies those performance obligations, determines the contract price for each obligation, allocates the transaction price to each performance obligation and recognizes revenue when the Company has satisfied the performance obligation by transferring control of the good or service to the franchisee. The Company is using the practical expedient under the guidance of ASU 2021-02 and is treating all pre-opening activities as distinct from the franchise license as defined in the next paragraph. The remainder of performance obligations not related to the grant of the license represent a single performance obligation. and are recognized over the term of the respective franchise agreement from the date the agreement is executed. Uncarned initial fee revenues from franchisee acquisition and acceptance will be recorded as deferred revenue and recognized as revenue over the term of the contract. The Company has no revenue from initial fees during the years ended December 31, 2023, 2022, and 2021.
Source: Item 23 — RECEIPT (FDD pages 50–178)
What This Means (2024 FDD)
According to the 2024 Chop5 Salad Kitchen Franchise Disclosure Document, the company recognizes revenue under the guidance of ASC 606 "Contracts with Customers." This standard dictates how Chop5 Salad Kitchen identifies performance obligations within its franchise agreements, determines the contract price for each obligation, allocates the transaction price, and recognizes revenue when it has satisfied the performance obligation by transferring control of the good or service to the franchisee.
Chop5 Salad Kitchen is using the practical expedient under the guidance of ASU 2021-02, treating all pre-opening activities as distinct from the franchise license. The remaining performance obligations not related to the grant of the license represent a single performance obligation and are recognized over the term of the respective franchise agreement from the date the agreement is executed. Unearned initial fee revenues from franchisee acquisition and acceptance will be recorded as deferred revenue and recognized as revenue over the term of the contract.
For a prospective franchisee, this means that the initial franchise fee paid to Chop5 Salad Kitchen is not immediately recognized as revenue by the company. Instead, it is recorded as deferred revenue and recognized over the term of the franchise agreement. This accounting practice aligns with the principle of recognizing revenue when the franchisor has fulfilled its obligations to the franchisee over time, rather than at a single point in time.