What is the impact of pre-opening activities being highly interrelated or interdependent to the access of Crown Gold Exchange's intellectual property?
Crown_Gold_Exchange Franchise · 2024 FDDAnswer from 2024 FDD Document
The Company's primarily performance obligation under the franchise agreement mainly includes granting certain rights to access the Company's intellectual property and a variety of activities relating to opening a franchise unit, including initial training and other such activities commonly referred to collectively as "pre-opening activities", which are recognized as a single performance obligation. The Company expects that certain pre-opening activities provided to the franchisee will not be brand specific and will provide the franchisee with relevant general business information that is separate and distinct from the operation of a company-branded franchise unit. The portion of pre-opening activities that will be provided that is not brand specific is expected to be distinct as it will provide a benefit to the franchisee and is expected not to be highly interrelated or interdependent to the access of the Company's intellectual property, and therefore will be accounted for as a separate distinct performance obligation. All other pre-opening activities are expected to be highly interrelated and interdependent to the access of the Company's intellectual property and therefore will be accounted for as a single performance obligation, which is satisfied by granting certain rights to access the Company's intellectual property over the term of each franchise agreement.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 38)
What This Means (2024 FDD)
According to Crown Gold Exchange's 2024 Franchise Disclosure Document, the degree to which pre-opening activities are interrelated or interdependent with access to the company's intellectual property affects how revenue is recognized. Specifically, the FDD states that Crown Gold Exchange's primary performance obligation under the franchise agreement includes granting rights to access their intellectual property, along with pre-opening activities like initial training.
The document indicates that Crown Gold Exchange expects some pre-opening activities will not be brand specific and will offer franchisees general business information separate from the operation of a Crown Gold Exchange franchise. These activities are considered distinct because they benefit the franchisee and are not highly interrelated or interdependent with access to Crown Gold Exchange's intellectual property. As such, these activities are accounted for as a separate performance obligation.
However, all other pre-opening activities are expected to be highly interrelated and interdependent with access to Crown Gold Exchange's intellectual property. These activities are treated as a single performance obligation, which is satisfied by granting rights to access the company's intellectual property over the term of the franchise agreement. This means that the revenue associated with these interrelated pre-opening activities is recognized over the life of the franchise agreement, rather than immediately upon completion of the activities.