What is the difference between how Crab N Spice accounts for brand-specific and non-brand-specific pre-opening activities?
Crab_N_Spice Franchise · 2024 FDDAnswer from 2024 FDD Document
The Company's primarily performance obligation under the franchise agreement mainly includes granting certain rights to access the Company's intellectual property and a variety of activities relating to opening a franchise unit, including initial training and other such activities commonly referred to collectively as "pre-opening activities", which are recognized as a single performance obligation. The Company expects that certain pre-opening activities provided to the franchisee will not be brand specific and will provide the franchisee with relevant general business information that is separate and distinct from the operation of a company-branded franchise unit. The portion of pre-opening activities that will be provided that is not brand specific is expected to be distinct as it will provide a benefit to the franchisee and is expected not to be highly interrelated or interdependent to the access of the Company's intellectual property, and therefore will be accounted for as a separate distinct performance obligation. All other pre-opening activities are expected to be highly interrelated and interdependent to the access of the Company's intellectual property and therefore will be accounted for as a single performance obligation, which is satisfied by granting certain rights to access the Company's intellectual property over the term of each franchise agreement.
The Company estimates the stand-alone selling price of pre-opening activities using an adjusted market assessment approach. The Company will first allocate the initial franchise fees and the fixed consideration, under the franchise agreement to the standalone selling price of the training services that are not brand specific and the residual, if any, to the right to access the Company's intellectual property. Consideration allocated to pre-opening activities, which are not brand specific are recognized ratably as those services are rendered. Consideration allocated to pre-opening activities included under Accounting Standards Update (ASU) to ASC 606, Franchisors—'Revenue from Contracts with Customers (Subtopic 952-606): Practical Expedient' is recognized when the related services have been rendered.
Source: Item 21 — FINANCIAL STATEMENTS (FDD pages 40–50)
What This Means (2024 FDD)
According to Crab N Spice's 2024 Franchise Disclosure Document, the company distinguishes between brand-specific and non-brand-specific pre-opening activities for accounting purposes. Crab N Spice considers pre-opening activities, such as initial training, as a single performance obligation under the franchise agreement, granting franchisees rights to access the company's intellectual property.
Crab N Spice recognizes that some pre-opening activities offer franchisees general business information that is separate from the operation of a Crab N Spice-branded franchise. These non-brand-specific activities are treated as a distinct performance obligation because they benefit the franchisee and are not highly interrelated or interdependent with access to Crab N Spice's intellectual property. The company recognizes revenue from these activities ratably as the services are rendered.
Conversely, pre-opening activities that are highly interrelated and interdependent with access to Crab N Spice's intellectual property are treated as a single performance obligation. Revenue from these brand-specific activities is recognized over the term of the franchise agreement as the rights to access the company's intellectual property are granted. Crab N Spice estimates the stand-alone selling price of pre-opening activities using an adjusted market assessment approach, allocating initial franchise fees and fixed consideration first to the non-brand-specific training services, with any residual amount allocated to the right to access the company's intellectual property.