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.
Material discussed in this communication is meant to provide general information and should not be acted on without obtaining professional advice tailored to you or your company’s individual and specific needs. Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used by any person or entity, for the purpose of (i) avoiding penalties that may be imposed on any taxpayer or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. This information is for general guidance only and is not a substitute for professional advice.
The information contained herein should not be construed as personalized investment advice. Investment in securities involves the risk of loss, and past performance is no guarantee of future results. There is no guarantee that the views and opinions expressed in this document will come to pass. Historical performance results for investment indexes and/or categories generally do not reflect the deduction of transaction and/or custodial charges or the deduction of an investment-management fee, the incurrence of which would have the effect of decreasing historical performance results. There can be no assurances that your portfolio will match or outperform any particular benchmark.
Information presented is believed to be factual and up-to-date; however, MFA makes no guarantee as to accuracy, completeness, suitability, or validity of any information within this communication and will not be liable for any errors, omissions, or delays in this information or any losses, injuries, or damages from its display or use. Any forward-looking statements are believed to be reasonable; however, MFA gives no assurance that such expectations will prove to be correct.