What are Cicis franchisees required to do to determine the transaction price for revenue recognition?
Cicis Franchise · 2025 FDDAnswer from 2025 FDD Document
Revenue recognition: The Company accounts for revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers, which provides a five-step model for recognizing revenue from contracts with customers as follows:
- Identify the contract with a customer
- Identify the performance obligations in the contract
- Determine the transaction price
- Allocate the transaction price to the performance obligations in the contract
- Recognize revenue when or as performance obligations are satisfied
Impact on payment terms: The transaction price is the amount of consideration to which the Company expects to be entitled in exchange for transferring goods and services to the customer. Agreements may include initial and renewal franchise fees, development and territory fees and sales-based royalties.
Initial and renewal franchise fees are recognized as revenue on a straight-line basis over the term of the respective agreement beginning when the restaurant opens, which range from five to 10 years. Payments received before the restaurant opens are recorded as deferred revenue in the combined balance sheets.
Upfront fees paid for development rights are apportioned to each franchised restaurant and recognized over the contractual term of the franchise agreement once each restaurant is opened.
Continuing royalties are calculated as a percentage of franchise restaurant sales that are related entirely to our performance obligation under the franchise agreement. These royalties are considered variable consideration but, because they relate to a license of intellectual property, they are not included in the transaction price. Instead, royalty revenue is recognized as franchised restaurant sales occur. Advertising contributions received from the franchisees are recorded as a component of franchise royalties and fees in the combined statements of income.
Technology and support fees of $100 are charged monthly and relate entirely to the Company's performance obligation under the franchise agreement and are recognized monthly as they are charged.
The Company believes its franchising, development and territory agreements do not contain a significant financing component because: (a) the timing of the upfront payment does not arise for the reason of provision of financing to the Company, and (b) the sales-based royalty is variable and based on factors outside the Company or the franchisee's control.
Source: Item 20 — OUTLETS AND FRANCHISEE INFORMATION (FDD pages 58–64)
What This Means (2025 FDD)
According to Cicis's 2025 Franchise Disclosure Document, the company adheres to ASC Topic 606, Revenue from Contracts with Customers, which outlines a five-step model for revenue recognition. The third step in this model specifically addresses determining the transaction price.
For Cicis, the transaction price is defined as the amount of consideration the company anticipates receiving in exchange for providing goods and services to the customer. This encompasses various fees, including initial and renewal franchise fees, development and territory fees, and sales-based royalties. Initial and renewal franchise fees are recognized as revenue on a straight-line basis over the agreement term, which typically ranges from five to ten years, starting when the restaurant opens. Payments received before the restaurant's opening are recorded as deferred revenue on the combined balance sheets.
Upfront fees paid for development rights are allocated to each franchised restaurant and recognized over the franchise agreement's contractual term once each restaurant is opened. Continuing royalties, calculated as a percentage of franchise restaurant sales, are related to Cicis's performance obligation under the franchise agreement. While these royalties are considered variable consideration, they are not included in the transaction price because they relate to a license of intellectual property. Instead, royalty revenue is recognized as franchised restaurant sales occur. Cicis also charges monthly technology and support fees of $100, which are recognized monthly as they are charged, as they relate to the company's performance obligation under the franchise agreement.
Cicis believes that its franchising, development, and territory agreements do not contain a significant financing component because the timing of upfront payments is not for financing the company, and the sales-based royalty is variable and based on factors outside the company's or the franchisee's control. Advertising contributions from franchisees are recorded as a component of franchise royalties and fees in the combined statements of income.