How does City Wide recognize initial franchise fees for accounting purposes?
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. Costs to obtain a contract primarily relate to broker expenses incurred by the Company and are presented as deferred franchise costs in the accompanying consolidated balance sheets.
The Company is also applying an accounting policy election, which allows an entity to exclude from revenue any amounts collected from customers on behalf of third parties, such as sales taxes and other similar taxes the Company collects concurrent with revenue-producing activities. Therefore, revenue is presented net of sales taxes and similar revenue-based taxes.
Note 3. Franchise Ownership
The Company has the right, but not the obligation to buy back franchises previously sold at a purchase price based on an offer that the franchisee has obtained.
The following changes in franchise ownership occurred during the years ended December 31 in the United States:
| 2024 | 2023 | 2022 | |
|---|---|---|---|
| Franchises Operating, Beginning of Year | 93 | 84 | 68 |
| Newly Established Franchises | 6 | 9 | 16 |
| Repurchased Franchises | - | - | - |
| Terminated Franchises | - | - | - |
| Franchises Operating, End of Year | 99 | 93 | 84 |
| New Established Franchises Since End of Year | - | - | 1 |
| Franchises Operating, Financial Statement Issue Date | 99 | 93 | 85 |
There are several franchises that are owned and operated by the principal stockholder of the Company.
For the years ended December 31, 2024, 2023, and 2022 there were four, four, and two franchises operating in Canada, respectively, which are not reflected in the table above. There are no active franchises in other international markets.
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 revenue from initial franchise and territory fees over the franchise term on a straight-line basis. This means that City Wide does not recognize the entire initial franchise fee as revenue immediately upon the sale of a franchise. Instead, it spreads the recognition of the revenue over the life of the franchise agreement. The portion of initial franchise fees that has not yet been recognized as revenue is recorded as deferred franchise revenue.
For a prospective City Wide franchisee, this accounting practice means that City Wide's reported revenue in any given year does not fully reflect the total amount of franchise fees it collected that year. Instead, the revenue reflects the portion of initial fees allocated to that specific period, along with ongoing royalties and other fees. This approach provides a more accurate picture of City Wide's financial performance by matching the revenue with the services and support provided to franchisees over the term of the agreement.
City Wide also amortizes broker fees, which are incremental costs of obtaining a franchise contract, over the term of the franchise agreement. These fees are initially capitalized as deferred franchise costs. Similarly, renewal and transfer fees are recognized ratably on a straight-line basis over the term of the renewed or transferred franchise agreement, unless a transfer fee is determined to be a contract modification, in which case the accounting treatment differs. Royalties, calculated as a percentage of monthly gross sales, are recognized as franchisee sales occur, and marketing fees are recorded as other services revenue to the extent that expenses have been incurred.