What is the basis for recognizing upfront franchise fees on a straight-line basis for Crave Cookies?
Crave_Cookies Franchise · 2025 FDDAnswer from 2025 FDD Document
For the franchise fees, the Company has determined that the services they provide in exchange for upfront franchise fees, which primarily relate to pre-opening training and other services, are individually distinct from the ongoing services they provide to their franchisees. As a result, these pre-opening are recognized upon the franchise opening, and completion of the related training. The pre-opening fees that are recognized upon the franchise opening are generally approximately 80% of the initial franchise fee. The remaining portion of the upfront franchise fees are recognized as revenue over the expected life of the franchise agreement, which is generally 10 years. If a franchise location closes before this estimated 10-year life, the Company recognizes the remaining unearned revenue and deferred costs into income at the time the location closes. Revenues for these upfront franchise fees are recognized on a straight-line basis, which is consistent with the franchisee's right to use and benefit from the intellectual property. Franchise fees that are collected prior to the location opening are considered contract liabilities (also known as deferred revenue) and are recognized as income when the franchise location opens.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 47)
What This Means (2025 FDD)
According to Crave Cookies' 2025 Franchise Disclosure Document, the company recognizes revenues from upfront franchise fees on a straight-line basis. This accounting practice is based on the franchisee's right to use and benefit from Crave Cookies' intellectual property over the expected life of the franchise agreement. Typically, the expected life of the franchise agreement is 10 years. This means that Crave Cookies spreads the recognition of a portion of the initial franchise fee revenue evenly over this 10-year period.
Specifically, Crave Cookies recognizes approximately 80% of the initial franchise fee upon the opening of the franchise and the completion of related training. The remaining portion of the upfront franchise fees is then recognized as revenue on a straight-line basis over the 10-year term. This approach aligns the revenue recognition with the period during which the franchisee is actively using the Crave Cookies brand, system, and other intellectual property assets.
If a Crave Cookies franchise location closes before the end of the 10-year term, the company will recognize any remaining unearned revenue and deferred costs into income at the time of closure. This ensures that the financial statements accurately reflect the revenue earned up to that point. Furthermore, franchise fees collected before the location opens are treated as contract liabilities, also known as deferred revenue, and are only recognized as income once the franchise location actually opens.