How are commissions paid for Cinnaholic franchises treated for revenue recognition purposes?
Cinnaholic Franchise · 2025 FDDAnswer from 2025 FDD Document
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Taxes on Income-The Company has elected to be taxed as a limited liability corporation for federal and state income tax purposes. Income and expenses for the Company pass through directly to the members' and is reported on its individual income tax returns.
3. REVENUE RECOGNITION
The Company records revenue in accordance Accounting Standards Board ("FASB") and Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers (Topic 606). The transaction price attributable to performance obligations are recognized as the performance obligations are satisfied. The portion of the franchise fee, if any, that is not attributable to a distinct performance obligation are amortized over the life of the related franchise agreements. Commission paid for franchises are amortized over the life of the franchise agreement. The company adopted ASC-606 and ASU 2021-02 using the modified retrospective method starting with January 1, 2020.
CINNAHOLIC FRANCHISING LLC NOTES TO FINANCIAL STATEMENTS
4. CONTRACT LIABILITIES AND CONTRACT ASSETS
In compliance with the Financial Accounting Standards Board ("FASB") new accounting standards for revenue recognition ("Topic 606"), the Company records its non-refundable franchise fees, net of amounts earned based on allowable direct services, as deferred revenues, to be recognized over the life of the franchise agreement.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 61)
What This Means (2025 FDD)
According to Cinnaholic's 2025 Franchise Disclosure Document, commissions paid for franchises are amortized over the life of the franchise agreement. This means that Cinnaholic does not recognize the entire commission as revenue immediately when it's received. Instead, the commission's revenue recognition is spread out evenly over the duration of the franchise agreement.
For a prospective Cinnaholic franchisee, this accounting practice has no direct financial impact on their operations. However, it provides insight into how Cinnaholic manages its finances and recognizes revenue. Amortizing commissions indicates a long-term view of revenue generation, aligning the recognition of income with the ongoing relationship between the franchisor and franchisee.
Furthermore, as of December 31, 2024, Cinnaholic had $884,883 in prepaid commissions that had not yet been expensed, and $972,229 as of December 31, 2023. This shows the magnitude of commissions Cinnaholic is dealing with and how much is yet to be recognized as expenses in their financial statements. This consistent amortization policy ensures that Cinnaholic's financial statements accurately reflect the revenue earned over the life of its franchise agreements.