How does Pearce Bespoke treat pre-opening activities under ASC 952-606?
Pearce_Bespoke Franchise · 2025 FDDAnswer from 2025 FDD Document
The Company recognizes revenue under the guidance of ASC 606 "Contracts with Customers".
Each franchise agreement is comprised of several performance obligations. The Company identifies those performance obligations, determines the contract price for each obligation, allocates the transaction price to each performance obligation, and recognizes revenue when the Company has satisfied the performance obligation by transferring control of the good or service to the franchisee. The Company is using the practical expedient under the guidance of ASC 952-606 and is treating all pre-opening activities as distinct from the franchise license as defined in the next paragraph. The Company has determined that 50% of its initial franchise fee is allocable to the pre-opening obligations in the franchise contract. The remainder of performance obligations not related to the grant of the license represent a single performance obligation. and are recognized over the term of the respective franchise agreement from the date the agreement is executed. Unearned initial fee revenues from franchisee acquisition and acceptance will be recorded as deferred revenue and recognized as revenue over the term of the contract which is currently 10 years.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 39)
What This Means (2025 FDD)
According to Pearce Bespoke's 2025 Franchise Disclosure Document, the company recognizes revenue under ASC 606, "Contracts with Customers." Pearce Bespoke uses the practical expedient under the guidance of ASC 952-606, treating all pre-opening activities as distinct from the franchise license. This means that Pearce Bespoke accounts for the services and support they provide to franchisees before they open separately from the rights granted under the franchise license itself.
Pearce Bespoke has determined that 50% of the initial franchise fee is allocated to these pre-opening obligations outlined in the franchise contract. The remaining performance obligations not related to the grant of the license represent a single performance obligation and are recognized over the term of the respective franchise agreement from the date the agreement is executed. The franchise agreement is for a term of 10 years.
For a prospective Pearce Bespoke franchisee, this accounting treatment means that half of the initial franchise fee covers the services Pearce Bespoke provides to help them get their mobile unit up and running. The other half of the initial franchise fee, along with other performance obligations, is recognized as revenue by Pearce Bespoke over the 10-year term of the franchise agreement. This also means that unearned initial fee revenues from franchisee acquisition and acceptance will be recorded as deferred revenue and recognized as revenue over the term of the contract.