Baskin Robbins 2013 Annual Report Download - page 73

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-63-
are recorded as a separate component of comprehensive income and stockholders’ equity, net of deferred taxes. Foreign
currency translation adjustments primarily result from our equity method investments, as well as subsidiaries located in
Canada, the UK, Australia, and Spain. Business transactions resulting in foreign exchange gains and losses are included in the
consolidated statements of operations.
(o) Revenue recognition
Franchise fees and royalty income
Domestically, the Company sells individual franchises as well as territory agreements in the form of store development
agreements (“SDAs”) that grant the right to develop restaurants in designated areas. Our franchise agreements and SDAs
typically require the franchisee to pay an initial nonrefundable fee and continuing fees, or royalty income, based upon a
percentage of sales. The franchisee will typically pay us a renewal fee if we approve a renewal of the franchise agreement.
Such fees are paid by franchisees to obtain the rights associated with these franchise agreements or SDAs. Initial franchise fee
revenue is recognized upon substantial completion of the services required of the Company as stated in the franchise
agreement, which is generally upon opening of the respective restaurant. Fees collected in advance are deferred until earned,
with deferred amounts expected to be recognized as revenue within one year classified as current deferred income in the
consolidated balance sheets. Royalty income is based on a percentage of franchisee gross sales and is recognized when earned,
which occurs at the franchisees’ point of sale. Renewal fees are recognized when a renewal agreement with a franchisee
becomes effective. Occasionally, the Company offers incentive programs to franchisees in conjunction with a franchise
agreement, SDA, or renewal agreement and, when appropriate, records the costs of such programs as reductions of revenue.
For our international business, we sell master territory and/or license agreements that typically allow the master licensee to
either act as the franchisee or to sub-franchise to other operators. Master license and territory fees are generally recognized
upon substantial completion of the services required of the Company as stated in the franchise agreement, which is generally
upon opening of the first restaurant or as stores are opened, depending on the specific terms of the agreement. Royalty income
is based on a percentage of franchisee gross sales and is recognized when earned, which generally occurs at the franchisees’
point of sale. Renewal fees are recognized when a renewal agreement with a franchisee or licensee becomes effective.
Rental income
Rental income for base rentals is recorded on a straight-line basis over the lease term, including the amortization of any tenant
improvement dollars paid (see note 2(i)). The difference between the straight-line rent amounts and amounts receivable under
the leases is recorded as deferred rent assets in current or long-term assets, as appropriate. Contingent rental income is
recognized as earned, and any amounts received from lessees in advance of achieving stipulated thresholds are deferred until
such threshold is actually achieved. Deferred contingent rentals are recorded as deferred income in current liabilities in the
consolidated balance sheets.
Sales of ice cream products
We distribute Baskin-Robbins ice cream products to Baskin-Robbins franchisees and licensees in certain international
locations. Revenue from the sale of ice cream products is recognized when title and risk of loss transfers to the buyer, which
was generally upon shipment through November 2012. Beginning in December 2012, title and risk of loss generally transfers
to the buyer upon delivery.
Sales at company-owned restaurants
Retail store revenues at company-owned restaurants are recognized when payment is tendered at the point of sale, net of sales
tax and other sales-related taxes.
Other revenues
Other revenues include fees generated by licensing our brand names and other intellectual property, as well as gains, net of
losses and transactions costs, from the sales of our restaurants to new or existing franchisees. Licensing fees are recognized
when earned, which is generally upon sale of the underlying products by the licensees. Gains on the refranchise or sale of a
restaurant are recognized when the sale transaction closes, the franchisee has a minimum amount of the purchase price in at-
risk equity, and we are satisfied that the buyer can meet its financial obligations to us. If the criteria for gain recognition are not
met, we defer the gain to the extent we have any remaining financial exposure in connection with the sale transaction. Deferred
gains are recognized when the gain recognition criteria are met.