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.