What is Crave Cookies' process for identifying performance obligations in a contract with a customer?
Crave_Cookies Franchise · 2025 FDDAnswer from 2025 FDD Document
Performance Obligations - The Company derives its revenues principally from three main sources: franchise fees and royalties, service sales, and product sales.
The Company determines the amount of revenue to be recognized in the revenue stream through the application of the following five-step model:
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- Identification of the contract, or contracts with the customer;
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- Identification of the performance obligations in the contract;
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- Determination of the transaction price:
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- Allocation of the transaction price to the performance obligations in the contract; and
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- Recognition of revenue when or as the Company satisfies the performance obligations
Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring distinct goods or providing services to customers.
As a franchisor, the Company's principal business is to sell franchises and continuing fees to provide managed assistance of those franchises. Franchise rights may be granted through a franchise agreement that sets out the terms of the arrangement with the franchisee. The franchise agreements require that the franchisee remit continuing royalty and marketing fees to the Company based on the monthly revenues of the franchisees. The franchise agreements also require certain, upfront franchise fees such as initial fees paid upon opening of a franchise. The Company recognizes revenue when performance obligations under the terms of contracts with its customers are satisfied, which occurs when pre-opening services are provided to a customer to enable them to direct the use and obtain the benefit of the franchise, with the remaining portion being recognized over the life of the contract.
The Company also sells products and services to customers. Sales to customers typically include products or equipment. The Company's performance obligation under these sales is to deliver products or equipment to customers and revenue is recognized at that point. The timing and amount of revenue recognized related to these revenues was not impacted by the adoption of Topic 606.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 47)
What This Means (2025 FDD)
According to Crave Cookies' 2025 Franchise Disclosure Document, the company uses a five-step model to determine the amount of revenue recognized from contracts. Step two of this model specifically addresses the identification of performance obligations within the contract. These performance obligations relate to the main revenue sources for Crave Cookies, which are franchise fees and royalties, service sales, and product sales.
For franchise agreements, Crave Cookies recognizes revenue when performance obligations are met. This occurs when pre-opening services are provided, enabling the franchisee to operate and benefit from the franchise. The remaining portion of the revenue is recognized over the life of the franchise agreement. This means Crave Cookies recognizes initial franchise fees and royalties as revenue over time as the franchisee operates their business.
When Crave Cookies sells products or equipment to customers, the performance obligation is fulfilled upon delivery of those items. Revenue is recognized at the point of delivery. This approach aligns with standard accounting practices, where revenue recognition is tied to the transfer of goods or services to the customer. Prospective franchisees should understand how these revenue recognition policies impact the financial reporting and overall financial health of Crave Cookies.
Understanding these performance obligations is crucial for franchisees as it directly relates to how Crave Cookies recognizes revenue and, consequently, reports its financial performance. This information can help franchisees assess the financial stability and growth potential of the Crave Cookies franchise system.