What is Crab N Spice's primary performance obligation under the franchise agreement?
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.
The remaining franchisee fee not allocated to pre-opening activities are recorded as Unearned Revenue and will be recognized over the term of the franchise agreement.
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's primary performance obligation under the franchise agreement involves granting franchisees certain rights to access Crab N Spice's intellectual property. This also includes various pre-opening activities related to setting up a franchise unit, such as initial training. These activities are considered a single performance obligation.
Crab N Spice distinguishes between brand-specific and non-brand-specific pre-opening activities. The non-brand-specific activities provide franchisees with general business information and are treated as a separate performance obligation because they benefit the franchisee independently and are not highly interrelated with access to Crab N Spice's intellectual property. All other pre-opening activities are considered highly interrelated and interdependent with access to the company's intellectual property.
The company estimates the stand-alone selling price of pre-opening activities using an adjusted market assessment approach. Initial franchise fees and fixed consideration are allocated to the training services that are not brand specific, with any residual amount allocated to the right to access the company's intellectual property. Consideration for non-brand-specific pre-opening activities is recognized as those services are rendered, while consideration for other pre-opening activities is recognized when the related services have been rendered under specific accounting standards.
The remaining franchisee fee not allocated to pre-opening activities is recorded as Unearned Revenue and is recognized over the term of the franchise agreement. This accounting treatment reflects how Crab N Spice recognizes revenue as it fulfills its obligations to the franchisee over the life of the agreement.