NOTE –REVENUE FROM CONTRACTS WITH CUSTOMERS

 

Effective the Company adopted ASC ASC 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. This new standard does impact the Company's recognition of revenue from sales of confectionary items to the Company’s franchisees and others, or in its Company-owned stores as those sales are recognized at the time of the underlying sale and are presented net of sales taxes and discounts. The standard also does change the recognition of royalties and marketing fees from franchised or licensed locations, which are based on a percent of sales and recognized at the time the sales occur. The standard does change the timing in which the Company recognizes initial fees from franchisees and licensees for new franchise locations and renewals that affect the term of the franchise agreement. The Company generally receives a fee associated with the Franchise Agreement or License Agreement (collectively “Customer Contracts”) at the time that the Customer Contract is entered. These Customer Contracts have a term of up to years, however the majority of Customer Contracts have a term of years. During the term of the Customer Contract the Company is obligated to many performance obligations that the Company has determined are distinct. The resulting treatment of revenue from Customer Contracts is that the revenue is recognized proportionately over the life of the Customer Contract.

 

 

The Company's policy for recognizing initial franchise and renewal fees through was to recognize initial franchise fees upon new store openings and renewals that impact the term of the franchise agreement upon renewal. In accordance with the new guidance, the initial franchise services are distinct from the continuing rights or services offered during the term of the franchise agreement, and will be treated as a single performance obligation. Beginning initial franchise fees are being recognized as the Company satisfies the performance obligation over the term of the franchise agreement, which is generally - years.

 

The following table summarizes contract liabilities as of and

 

 

 

At annual revenue expected to be recognized in the future, related to performance obligations that are yet fully satisfied, are estimated to be the following:

 

 

 

The Company’s franchisees sell gift cards, which do have expiration dates or non-usage fees. The proceeds from the sale of gift cards by the franchisees are accumulated by the Company and paid out to the franchisees upon customer redemption. The Company has historically accumulated gift card liabilities and has recognized breakage associated with the gift card liability. The adoption of ASC requires the use of the “proportionate” method for recognizing breakage, which the Company has historically utilized. Upon adoption of ASC the Company began recognizing breakage from gift cards when the gift card is redeemed by the customer or the Company determines the likelihood of the gift card being redeemed by the customer is remote (“gift card breakage”). The determination of the gift card breakage rate is based upon Company-specific historical redemption patterns.