What is the practical expedient Craters & Freighters uses to account for pre-opening services?
Craters_Freighters Franchise · 2025 FDDAnswer from 2025 FDD Document
Franchise Revenues
Franchise revenues consist primarily of royalties, advertising, technology and insurance fund contributions, and initial franchise fees. Under franchise agreements, the Company generally provides franchisees with (a) a franchise license, which includes a license to use the Company's intellectual property, advertising and promotion management, technology platforms, and insurance services, (b) pre-opening services, and (c) ongoing services. As a practical expedient (as defined in ASC 952-606-25-2 Revenue from Contracts with Customers, Recognition), the Company accounts for its pre-opening services as a distinct service from the franchise license and ongoing services in a franchise agreement. Pre-opening services include (a) assistance in the selection of a site, (b) assistance in obtaining facilities and preparing the facilities for their intended use, including related financing, architectural, and engineering services, and lease negotiations, (c) training of the franchisee's personnel or the franchisee, (d) preparation and distribution of manuals and similar material concerning operations, administration, and record keeping (e) bookkeeping, information technology, and advisory services, including setting up the franchisee's records and advising the franchisee about income, real estate, and other taxes or about regulations affecting the franchisee's business, and (f) inspection, testing, and other quality control programs. The Company records these pre-opening services fees as initial franchise fee revenue upon satisfaction of the performance obligation, typically when the franchisee begins operations. During the years ended December 31, 2024 and 2023, the Company received initial franchise fee revenue of $88,255 an
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 49)
What This Means (2025 FDD)
According to Craters & Freighters' 2025 Franchise Disclosure Document, the company uses a practical expedient, as defined in ASC 952-606-25-2 Revenue from Contracts with Customers, Recognition, to account for pre-opening services as distinct from the franchise license and ongoing services. This means that Craters & Freighters treats the pre-opening services as a separate deliverable in the franchise agreement for accounting purposes.
These pre-opening services include assistance with site selection, help in obtaining and preparing facilities (including financing, architectural, engineering services, and lease negotiations), training of personnel, preparation and distribution of operational manuals, bookkeeping, IT and advisory services related to taxes and regulations, and quality control programs. Craters & Freighters records the fees for these pre-opening services as initial franchise fee revenue.
This revenue is recognized when the performance obligation is satisfied, which typically occurs when the franchisee begins operations. For prospective franchisees, this accounting method means that Craters & Freighters recognizes the initial franchise fee revenue only after the franchisee has opened for business and is actively operating. In 2024 and 2023, Craters & Freighters received initial franchise fee revenue of $88,255 and $39,000, respectively.