How does Craters & Freighters present advertising fund revenues and expenses in its financial statements?
Craters_Freighters Franchise · 2025 FDDAnswer from 2025 FDD Document
$39,000, respectively.
Royalties, including franchisee contributions to advertising funds, represent sales-based royalties and are calculated as a percentage of net sales reported by franchisees and recognized over time as franchisee sales occur. These revenues are presented within "royalties" and expenses incurred to provide these services are included within "franchisee support." Regarding advertising funds, under the new revenue standard, the Company has determined it acts as a principal of the franchisee advertising transactions, thus, revenue and expense are presented gross. These revenues are presented within "franchise revenues" and expenses incurred to provide these services are included within "advertising." When revenues of an advertising program exceed the related advertising expenses, advertising costs are accrued up to the amount of revenues on an annual basis.
Note 1: Summary of Significant Accounting Policies (Continued)
Revenue Recognition (Continued)
Franchise revenues relating to technology and insurance programs are recognized over time on a monthly basis as the franchisee utilizes the program features.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 49)
What This Means (2025 FDD)
According to Craters & Freighters's 2025 Franchise Disclosure Document, the company treats franchisee contributions to advertising funds as revenue. These revenues are included within "franchise revenues," and the expenses incurred to provide these advertising services are included within "advertising." This means that Craters & Freighters presents advertising fund revenues and expenses on a gross basis in its financial statements. The FDD specifies that Craters & Freighters has determined it acts as a principal in these transactions. This accounting treatment impacts how the advertising fund is reflected in the company's financials.
For a prospective Craters & Freighters franchisee, this gross presentation means that both the advertising revenue collected from franchisees and the corresponding advertising expenses incurred by the company are fully visible on the income statement. This provides a more transparent view of the advertising fund's activity and its impact on Craters & Freighters's overall financial performance.
Additionally, the FDD states that when revenues of an advertising program exceed the related advertising expenses, advertising costs are accrued up to the amount of revenues on an annual basis. This indicates that Craters & Freighters manages the advertising fund to ensure that expenses do not exceed revenues, and any excess revenue is accrued for future advertising activities. In 2023 and 2022, Craters & Freighters's advertising expenses totaled $951,719 and $1,062,221, respectively.