How does Craters & Freighters treat advertising fund transactions under the new revenue standard?
Craters_Freighters Franchise · 2025 FDDAnswer from 2025 FDD Document
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.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 49)
What This Means (2025 FDD)
According to Craters & Freighters's 2025 Franchise Disclosure Document, the company has determined that it acts as the principal in franchisee advertising transactions under the new revenue standard. This means that Craters & Freighters presents both the revenue and expenses related to these transactions on a gross basis in their financial statements. The revenues are categorized under "franchise revenues," while the corresponding expenses are included within "advertising."
For a prospective franchisee, this accounting treatment is important because it affects how the advertising fund is reported in Craters & Freighters's financial statements. Instead of netting advertising revenue against advertising expenses, both are shown separately and in full. This provides a more transparent view of the total advertising revenue generated and the total advertising expenses incurred.
Furthermore, the FDD states that if the revenues of an advertising program exceed the related advertising expenses, Craters & Freighters accrues advertising costs up to the amount of revenues on an annual basis. This implies that Craters & Freighters aims to balance advertising revenue and expenses, ensuring that advertising funds are primarily used for their intended purpose. This could be a positive aspect for franchisees, as it suggests that excess funds are reinvested into advertising activities.