Note 3 - Revenue From Contracts With Customers

6 Months Ended

Aug. 31, 2020

Notes to Financial Statements

Revenue from Contract with Customer [Text Block]

NOTE

3

–REVENUE FROM CONTRACTS WITH CUSTOMERS

Effective

March 1, 2018,

the Company adopted 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. This new standard does

not

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

not

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

20

years, however the majority of Customer Contracts have a term of

10

years. During the term of the Customer Contract the Company is obligated to many performance obligations that the Company has

not

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.

Initial Franchise Fees, License Fees, Transfer Fees and Renewal Fees

The Company's policy for recognizing initial franchise and renewal fees through

February 28, 2018

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

not

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

March 1, 2018,

initial franchise fees are being recognized as the Company satisfies the performance obligation over the term of the franchise agreement, which is generally

10

-

15

years.

The following table summarizes contract liabilities as of

August 31, 2020

and

August 31, 2019:

	Six Months Ended
	August 31:
	2020			2019
Contract liabilities at the beginning of the year:	$	1,155,809		$	1,352,572
Revenue recognized		(128,636	)		(188,209	)
Contract fees received		53,500			57,833
Amortized gain on the financed sale of equipment		(4,176	)		(6,267	)
Contract liabilities at the end of the period:	$	1,076,497		$	1,215,929

At

August 31, 2020,

annual revenue expected to be recognized in the future, related to performance obligations that are

not

yet fully satisfied, are estimated to be the following:

FY 21	$	94,959
FY 22		182,079
FY 23		170,353
FY 24		137,744
FY 25		124,461
Thereafter		366,901
Total	$	1,076,497

Gift Cards

The Company's franchisees sell gift cards, which do

not

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

not

recognized breakage associated with the gift card liability. The adoption of ASC

606

requires the use of the “proportionate” method for recognizing breakage, which the Company has

not

historically utilized. Upon adoption of ASC

606

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.

ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES

NOTES TO INTERIM (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS