How does City Publications recognize revenue when a performance obligation is satisfied?
City_Publications Franchise · 2025 FDDAnswer from 2025 FDD Document
The Company recognizes revenue under the guidance of ASC 606 "Contracts with Customers". The Company's revenue mainly consists of franchise fees, royalties, and ancillary revenues.
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 ASC 606 and is treating all pre-opening activities as distinct from the franchise license as defined in the next paragraph. The Company has determined that 90% of its initial franchise fee is allocable to the pre-opening obligations in the franchise contract. 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. Unearned initial fee revenues from franchisee acquisition and acceptance will be recorded as nonrefundable deferred franchise fees and recognized as revenue over the term of the contract which is currently 10 years.
When a franchisee purchases a franchise, the Company grants the franchisee the right to use the proprietary methods, techniques, trade dress, trademarks, and logos ("the license") for a specific period of time and in a specific territory. The license is symbolic intellectual property. Revenues related to the license are continuing royalties of 6% of gross sales, subject to a minimum royalty as defined in the franchise agreement. Royalty revenues are compensation for the use of the license in the territory, over the term of the contract, and will be used in part to continue the development of the Company's brand, the franchise system and provide on-going support for the Company's franchisees. The royalties are billed monthly and are recognized as revenue when earned.
Source: Item 23 — RECEIPT (FDD pages 39–129)
What This Means (2025 FDD)
According to City Publications' 2025 Franchise Disclosure Document, the company recognizes revenue based on ASC 606 "Contracts with Customers." City Publications' revenue streams primarily consist of franchise fees, royalties, and ancillary revenues.
Each franchise agreement contains multiple performance obligations. City Publications identifies these obligations, determines the contract price for each, allocates the transaction price accordingly, and recognizes revenue when the company satisfies the performance obligation by transferring control of the good or service to the franchisee. City Publications uses a practical approach under ASC 606, treating all pre-opening activities as separate from the franchise license.
Specifically, 90% of the initial franchise fee is allocated to pre-opening obligations and is recognized as revenue over the term of the franchise agreement, which is currently 10 years. The remaining performance obligations not related to the grant of the license represent a single performance obligation. Unearned initial fee revenues from franchisee acquisition and acceptance are recorded as nonrefundable deferred franchise fees and recognized as revenue over the 10-year contract term.
Revenues related to the franchise license itself are recognized through continuing royalties, set at 6% of gross sales, subject to a minimum royalty as defined in the franchise agreement. These royalty revenues compensate City Publications for the use of its intellectual property within the franchisee's territory over the contract term and support the ongoing development of the brand and franchise system. Royalties are billed monthly and recognized as revenue when earned.