For Corner Bakery Cafe, how is revenue recognized?
Corner_Bakery_Cafe Franchise · 2025 FDDAnswer from 2025 FDD Document
d must be spent for designated purposes.
Notes to Financial Statements For the Reporting Periods ended December 31, 2024 and 2023
Revenue Recognition
The Company recognizes revenue in a manner that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services using a five-step model.
Revenue from franchisees, which is primarily comprised of initial franchise fees, franchise royalty fees, advertising fund fees, and other franchise fees, is generated pursuant to a twenty-year renewable contract between the Company and a franchisee.
Initial Franchise Fees
During 2024 or 2023, no franchises were sold, and accordingly, no initial franchise fees were charged.
As of December 31, 2024, there was one franchisee that owned eleven locations, one franchisee that owned seven locations, one franchisee that owned five locations, one franchisee that owned four locations, three franchisees that owned two locations each, and five franchisees that owned one location each.
As of January 1, 2024, each franchisee is required to pay an initial franchise fee of $40,000, upon signing a franchise agreement. The Company offers reduced franchise fees for franchisees that sign a Development Agreement to open two to three locations; however, at this time, no development agreements have been signed. Upon signing a Development Agreement the franchisee will pay $20,000 for each location they agree to develop. The fee is recognizable at the time of the opening of the location.
The initial franchise fee obligates the Company to perform certain pre-opening services, such as assisting with site selection, preparing facilities for intended use, training, establishing operations, and overseeing quality control. Pursuant to ASU No. 2021-02 Franchisors-Revenue from Contracts with Customers (Subtopic 952-606), the Company has determined that these pre-opening services are distinct from the franchise license and has elected to recognize pre-opening services as a single performance obligation.
As of January 1, 2024, each franchisee looking to purchase an existing franchise location being sold by a current franchisee is required to pay a transfer fee of $7,500 or such amount as agreed to by the Company. The transfer fee obligates the Company to perform the same pre-opening services related to an initial franchise fee.
Initial franchise fee and transfer fee revenue not yet recognized is included in contract liability on the balance sheet until earned.
The Company will determine the portion of the initial franchise fees, or transfer fees, that should be recognized in the month a franchisee opens for business and the remainder over the twenty year life of the franchise contract.
Notes to Financial Statements For the Reporting Periods ended December 31, 2024 and 2023
Franchises have the option to renew the franchise for ten years, up to two times, at the conclusion of the franchise agreement, with the Company's approval, subject to a renewal fee of half of the then current initial franchise fee, $20,000 as of January 1, 2024.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 55)
What This Means (2025 FDD)
According to Corner Bakery Cafe's 2025 Franchise Disclosure Document, the company recognizes revenue using a five-step model that depicts the transfer of promised goods or services to customers. This recognition reflects the consideration Corner Bakery Cafe expects to receive in exchange for those goods or services. The revenue streams primarily come from initial franchise fees, franchise royalty fees, advertising fund fees, and other franchise fees, all of which are generated from a twenty-year renewable contract with the franchisee.
Initial franchise fees are recognized as revenue when earned. As of January 1, 2024, the initial franchise fee is $40,000. For franchisees signing a Development Agreement to open two to three locations, the fee is reduced to $20,000 per location, recognizable upon the opening of each location. These fees cover pre-opening services such as site selection assistance, facility preparation, training, operational setup, and quality control. Corner Bakery Cafe recognizes these pre-opening services as a single performance obligation, separate from the franchise license.
Franchise royalty fees are based on 5% of the gross sales of a franchise location, collected monthly, unless otherwise agreed upon. Advertising fund fees are 0.75% of gross revenue from franchisees and are also earned monthly. Other franchise fees are recognized as revenue when billed. Transfer fees, required when a franchisee purchases an existing location, are $7,500 as of January 1, 2024, and are treated similarly to initial franchise fees in terms of revenue recognition. Renewal fees, applicable when a franchise is renewed for an additional ten years, are half of the current initial franchise fee, which is $20,000 as of January 1, 2024.