Revenue Recognition Simplified for Franchises
The Financial Accounting Standards Board (FASB) recently released an accounting standards update to provide a “practical expedient” allowing privately-owned franchise businesses a simplified way to determine the timing of revenue recognition as it relates to fees paid by the franchisee to the franchisor.
Using the new guidance, a franchisor can recognize revenue from a franchisee’s initial fee immediately, taking into account certain pre-opening services provided to the franchisee as a single and separate performance obligation. Historically, franchisors would recognize initial fees after certain conditions relating to the sale have been satisfied, leaving the franchise fees to be recognized over the full term of the contract.
Pre-opening services would include support for locating and preparing a site or facility, employee training, services such as bookkeeping, IT and advisory related to initial setup, and inspection and testing of quality control programs.
The guidance was initially proposed in response to concerns from the franchise community about the complexity associated with applying ASC 606 revenue recognition standards. In April 2020, FASB voted to extend the ASC 606 implementation timeline for non-public franchises to annual reporting periods beginning after December 15, 2019, and interim reporting periods within annual reporting periods beginning after December 15, 2020.
For more information about how this guidance impacts your franchise’s accounting operations, please connect with a member of the MFA team.
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