How are the remaining performance obligations not related to the grant of the license recognized by City Publications?
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.
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." The franchise agreement includes several performance obligations. City Publications identifies these obligations, determines the contract price for each, allocates the transaction price, and recognizes revenue when the obligation is fulfilled 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.
The document states that 90% of the initial franchise fee is allocated to pre-opening obligations. The remaining performance obligations, which are not related to granting the license, are treated as a single performance obligation. City Publications recognizes these obligations over the term of the franchise agreement, starting from the date the agreement is executed.
Unearned initial fee revenues from franchisee acquisition and acceptance are recorded as nonrefundable deferred franchise fees. These fees are then recognized as revenue over the contract term, which is currently 10 years. This means that City Publications spreads out the recognition of the remaining 10% of the initial franchise fee over the entire 10-year term of the agreement, rather than recognizing it upfront.