As part of Cicis' revenue recognition, what is involved in determining the transaction price?
Cicis Franchise · 2025 FDDAnswer from 2025 FDD Document
-----|---------------|---------------| | | | | | | Revenue recognized at a point in time | | $ 42,474,332 | $ 41,301,256 | | Revenue recognized over time | | 72,368 $ 42,546,700 | 57,395 $ 41,358,651 | | | | | | 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.
Notes to Combined Financial Statements
Note 1. Organization and Summary of Significant Accounting Policies (Continued)
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 ten 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 marketing 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.
Source: Item 20 — OUTLETS AND FRANCHISEE INFORMATION (FDD pages 58–64)
What This Means (2025 FDD)
According to Cicis' 2025 Franchise Disclosure Document, determining the transaction price is a key step in the company's revenue recognition process. Cicis accounts for revenue based on a five-step model that aligns with ASC Topic 606, "Revenue from Contracts with Customers." The transaction price is the amount Cicis expects to receive in exchange for providing goods and services to its customers. These agreements typically 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 agreement, which usually ranges from five to ten years, starting when the restaurant opens. Any payments received before the restaurant opens are recorded as deferred revenue on the balance sheets. Upfront fees paid for development rights are allocated to each franchised restaurant and recognized over the contractual term of the franchise agreement once each restaurant is opened.
Continuing royalties, calculated as a percentage of franchise restaurant sales, are related to Cicis' 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. Similarly, advertising contributions from franchisees are recorded as a component of marketing fees on 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.
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 the purpose of providing financing to the company, and the sales-based royalty is variable and based on factors outside the company's or the franchisee's control. This approach to revenue recognition ensures that Cicis accurately reflects its financial performance and obligations in accordance with accounting standards.