According to ASC 606, when does Monicals Pizza recognize revenue?
Monicals_Pizza Franchise · 2025 FDDAnswer from 2025 FDD Document
The Company recognizes revenue in accordance with ASC 606, which provides that revenues are to be recognized when control of promised goods or services is transferred to a customer in an amount that reflects the consideration expected to be received for those goods or services.
Restaurant Sales – Substantially all restaurant sales represent retail sales to the general public through Company-owned restaurants. Such amounts are recognized as revenue at the point of sale on the cash basis at the time of the underlying sale and are presented net of sales tax and other sales-related taxes.
Royalty Fees - The Company receives royalty fees, ranging from one percent to four percent of franchisees' sales. Since ongoing franchise royalty fees are based on actual franchise restaurant sales, the fees will fluctuate and are considered variable consideration. ASC 606 requires variable consideration to be estimated. However, there is an exception to this requirement for sales-based royalties related to licenses of intellectual property. These fees are recognized as revenue when sales are generated by the franchisees and comprise the entire franchising revenue amount in the accompanying consolidated financial statements for the years ended December 31, 2024 and 2023.
Initial Franchise Fees – When a new franchise is sold, the Company grants the franchisee a license to own and operate a franchised restaurant. As part of this license, the Company agrees to provide certain services to the franchisee. Generally, these services include assistance in site selection, training personnel, implementation of an accounting system, and design of a quality control program. Franchise agreements are valid for five years and during that time, the franchisee is allowed to use the Monical's name, recipes and menu. When the franchise agreement expires, the franchisee must pay an additional franchise fee to renew the agreement; however, at its discretion, the Company may waive the renewal fee.
In accordance with ASU 2021-02, initial franchise fees are recognized when the services and conditions relating to the sale of the franchise are substantially performed or satisfied by the Company. The services and conditions required to be performed or satisfied by the Company principally include site selection approval, equipment specification assistance and training assistance. Franchise fees received prior to substantial performance by the Company are deferred. Substantial performance is normally deemed to have occurred when the related franchise location opens for business.
Source: Item 23 — RECEIPTS (FDD pages 46–257)
What This Means (2025 FDD)
According to Monicals Pizza's 2025 Franchise Disclosure Document, the company recognizes revenue in accordance with ASC 606, which dictates that revenue is recognized when control of promised goods or services is transferred to a customer. This recognition occurs in an amount that reflects the consideration expected to be received for those goods or services. For restaurant sales, revenue is recognized at the point of sale on a cash basis, net of sales tax and other sales-related taxes.
Monicals Pizza receives royalty fees ranging from 1% to 4% of franchisees' sales. These royalty fees, considered variable consideration under ASC 606, are recognized as revenue when sales are generated by the franchisees. This revenue recognition aligns with the exception for sales-based royalties related to licenses of intellectual property. The company uses the allowance method to account for uncollectible royalty fees, basing it on historical collection experience and a review of the current status of royalty fees receivable.
Initial franchise fees are recognized when the services and conditions relating to the sale of the franchise are substantially performed or satisfied by Monicals Pizza. These services include site selection approval, equipment specification assistance, and training assistance. Substantial performance is typically deemed to have occurred when the related franchise location opens for business. Franchise fees received prior to substantial performance are deferred, meaning they are not recognized as revenue until the services are rendered.