United States

Proposed ASC 606 practical expedient for private-company franchisors

FINANCIAL REPORTING INSIGHTS  | 

A franchise agreement generally stipulates that the franchisor will be paid an initial franchise fee in a lump sum in exchange for establishing a franchise relationship, along with the provision of varying levels of pre-opening support, such as training or site selection. When implementing Topic 606, Revenue from Contracts with Customers, of the Financial Accounting Standards Boards’ (FASB) Accounting Standards Codification (ASC), private-company franchisors expressed concerns about the level of effort required to account for initial franchise fees due to the complexity in determining whether pre-opening activities contain any separate performance obligations.

To address these concerns, the FASB recently issued a proposed Accounting Standards Update (ASU), Franchisors – Revenue from Contracts with Customers (Subtopic 952-606): Practical Expedient. If finalized, the proposal would provide a practical expedient in ASC 952-606-25-2 that permits a private-company franchisor entering into a franchise agreement to account for certain pre-opening services as a single bundled, separate performance obligation if it is probable that the continuing fees in the franchise agreement would be sufficient to cover the franchisor’s continuing costs plus a reasonable profit. If a franchisor elects to use the practical expedient in ASC 952-606-25-2, it would be required to disclose that fact. If a franchisor elects not to apply the practical expedient or if the services performed are not included in the list in ASC 952-606-25-2, it would be required to apply the ASC 606 guidance on identifying performance obligations.

If finalized, the proposed ASU would be effective for:

  • An entity that has not yet adopted ASC 606 – Annual reporting periods beginning after December 15, 2019 and interim reporting periods within annual reporting periods beginning after December 15, 2020.
  • An entity that has adopted ASC 606 – Interim and annual periods beginning after December 15, 2020. Early application would be permitted.

The proposed ASU is available for comment until November 5, 2020.

How can we help you?

To discuss how our team can help your business, contact us by phone 800.274.3978 or

EMAIL US


Subscribe to Financial Reporting Insights