How does City Wide recognize fixed consideration for the franchise right derived from initial franchise and territory fees?
City_Wide Franchise · 2025 FDDAnswer from 2025 FDD Document
------------------------| | Accounts receivable, beginning of year | $ 4,711,498 | $ 4,120,583 | $ 3,441,894 | | Accounts receivable, end of year | 5,389,631 | 4,711,498 | 4,120,583 | | Deferred revenue, beginning of year | 4,670,084 | 4,114,382 | 2,890,992 | | Deferred revenue, end of year | 5,173,377 | 4,670,084 | 4,114,382 |
Significant Judgments
For contracts where control is transferred over time, the Company recognizes revenue over time as progress is made toward satisfying the performance obligations of each contract in a variety of manners. Fixed consideration for the franchise right derived from initial franchise and territory fees is recognized straight-line over the franchise period, as the Company continuously provides access to the symbolic intellectual property. Variable consideration for the franchise right derived from royalties and the marketing fund are measured under the sales-based royalty approach. Contract consideration attributable to other services are recognized as performed, in proportion to the overall service period.
Accounting Policies and Practical Expedients Elected
For incremental costs of obtaining a contract, the Company elected a practical expedient, which permits an entity to recognize incremental costs to obtain a contract as an expense when incurred if the amortization period is less than one year.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 65)
What This Means (2025 FDD)
According to City Wide's 2025 Franchise Disclosure Document, the company recognizes fixed consideration for the franchise right, which comes from initial franchise and territory fees, using a straight-line method over the franchise period. This means that City Wide does not recognize the entire initial franchise fee as revenue immediately. Instead, it recognizes a portion of the fee each period (e.g., monthly or quarterly) throughout the term of the franchise agreement.
This approach reflects the fact that City Wide provides continuous access to its symbolic intellectual property over the life of the franchise agreement. The unrecognized portion of these initial fees is recorded as deferred franchise revenue, representing a liability on City Wide's balance sheet until it is recognized as earned revenue.
For a prospective franchisee, this accounting practice means that City Wide's reported revenue in any given period does not fully reflect the initial fees it collects from new franchisees. Instead, the revenue is spread out over the term of the franchise agreement. This can provide a more accurate picture of City Wide's ongoing financial performance, as it smooths out the impact of large upfront payments. Similarly, broker fees are capitalized as deferred franchise costs and amortized over the term of the franchise agreement.