Over what period does Golden Krust Caribbean Restaurant recognize royalty income?
Golden_Krust_Caribbean_Restaurant Franchise · 2024 FDDAnswer from 2024 FDD Document
The franchise agreements typically require the franchisee to pay initial, nonrefundable franchise license fees prior to opening the respective restaurant, as well as continuing fees, or royalty income, on a weekly basis based upon a percentage of franchisee gross sales. The initial term of the franchise agreements are typically ten years. Prior to the end of the franchise term, or as otherwise provided by the Company, a franchisee may elect to renew the term of a franchise agreement and, if approved, will typically pay a renewal fee upon execution of the renewal term. Generally, the franchise license granted for each individual restaurant within an arrangement represents a single performance obligation.
Initial franchise fees for each arrangement are allocated to each individual restaurant and recognized over the term of the respective franchise agreement from the date of the restaurant opening. Royalty income is also recognized over the term of the respective franchise agreement based on the royalties earned each period as the underlying sales occur. Fees received or receivable that are expected to be recognized as revenue within one year are classified as current deferred revenue on the balance sheets. Any royalty revenue that is not paid within 30 days is reserved against.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 35)
What This Means (2024 FDD)
According to Golden Krust Caribbean Restaurant's 2024 Franchise Disclosure Document, royalty income is recognized over the term of the respective franchise agreement. This recognition is based on the royalties earned each period as the underlying sales occur. The franchise agreements typically have an initial term of ten years.
For a prospective franchisee, this means that the royalty fees paid weekly, which are a percentage of gross sales, are recognized by Golden Krust Caribbean Restaurant as income throughout the duration of the franchise agreement. This aligns the franchisor's revenue recognition with the franchisee's ongoing operation and sales generation.
Additionally, any royalty revenue that remains unpaid for more than 30 days is reserved against, indicating a conservative approach to revenue recognition. This policy could impact the financial reporting of Golden Krust Caribbean Restaurant, as they only recognize royalty income they are likely to collect.