How does Potbelly Sandwich Works record its financial instruments?
Potbelly_Sandwich_Works Franchise · 2025 FDDAnswer from 2025 FDD Document
the time of its launch.
We defer revenue associated with the estimated selling price of coins earned by Potbelly Perks members towards free entrées as each point is earned, and a corresponding deferred revenue liability is established in accrued expenses. The deferral is based on the estimated value of the unredeemed coins and free entrées. The estimated value and the estimated redemption rates are based on a historical data analysis of loyalty reward redemptions. Estimated breakage is recognized in net shop sandwich sales and franchise royalties, fees and rental income, based on sales at company-operated and franchise operated shops, respectively, as a percentage of system-wide sales in the consolidated statement of operations. When coins are redeemed, we recognize revenue for the redeemed product and reduce accrued expenses.
Contract Costs
Sales commissions earned by internal or external sales personnel for the execution of new franchise agreements are considered incremental and recoverable costs of obtaining a contract with a customer. Sales commissions for new franchise agreements are capitalized and then amortized on a straight-line basis over the term of the franchise agreement, which is typically eight years.
Development costs incurred for the identification of optimal site selection within a given market assists with the company's ability to fulfill the franchise agreement and such costs are expected to be recovered. These costs are capitalized if the service performed relates to an executed development or franchise agreement, in which case the costs are amortized over the term of the associated agreement, which is generally eight or ten years.
(n) Leases
We determine if an arrangement is or contains a lease at inception of the arrangement. To meet the definition of a lease, the contract must meet all three of the following criteria:
- One party (lessor) must hold an identified asset;
- The counterparty (lessee) must have the right to obtain substantially all of the economic benefits from the use of the asset throughout the period of the contract; and
- The counterparty (lessee) must have the right to direct the use of the identified asset throughout the period of the contract.
We lease retail shops, warehouse, and office space under operating leases. Our leases generally have terms of ten years and most include options to extend the leases for additional five-year periods. For leases with renewal periods at our option, we determine the expected lease period based on whether the renewal of any options are reasonably assured at the inception of the lease.
Source: Item 11 — FRANCHISOR'S ASSISTANCE, ADVERTISING, COMPUTER SYSTEMS, AND TRAINING (FDD pages 37–49)
What This Means (2025 FDD)
According to Potbelly Sandwich Works' 2025 Franchise Disclosure Document, several notes detail how the company records financial instruments. Potbelly Sandwich Works defers revenue related to coins earned by loyalty program members for free entrees and establishes a deferred revenue liability in accrued expenses. This deferral is based on the estimated value of unredeemed coins and free entrees, with the estimated value and redemption rates determined through historical data analysis of loyalty reward redemptions. Breakage, which represents unredeemed coins, is recognized in net shop sandwich sales and franchise royalties, fees, and rental income, based on sales at company-operated and franchise-operated shops, respectively, as a percentage of system-wide sales in the consolidated statement of operations. When coins are redeemed, Potbelly Sandwich Works recognizes revenue for the redeemed product and reduces accrued expenses.
Additionally, sales commissions for new franchise agreements are considered incremental and recoverable costs of obtaining a contract with a customer. These commissions are capitalized and then amortized on a straight-line basis over the term of the franchise agreement, typically eight years.
Regarding leases, Potbelly Sandwich Works recognizes lease expense on a straight-line basis over the lease term, accounting for rent escalations typically included in their leases. Tenant incentives used to fund leasehold improvements are recognized when earned and reduce right-of-use assets related to the lease. These incentives are amortized through the right-of-use asset as reductions of rent expense over the lease term. Potbelly Sandwich Works also elected a short-term lease exception policy, which allows them to not apply the recognition requirements of Accounting Standards Codification (ASC) 842, Leases, to leases with terms of 12 months or less, and they account for lease and non-lease components as a single component for certain classes of assets.
For subleases to franchisees, rental income for operating leases is recorded as franchise royalties, fees, and rental income in the consolidated statement of operations. Potbelly Sandwich Works recognizes revenue for fixed sublease payments, net of incentives, on a straight-line basis over the term of the sublease, and for variable sublease payments as the related service has been transferred to the sublessee, provided that collectability is probable.