Revenue recognition by private company franchisors
FINANCIAL REPORTING INSIGHTS |
On November 5, 2018, the Financial Accounting Standards Board (FASB) released an educational FASB staff paper that provides examples to help private company franchisors implement the new revenue recognition standard. The paper primarily addresses questions related to the use of judgment in determining whether an initial franchise fee relates to a single performance obligation for the license of intellectual property, which must be recognized over the term of the arrangement, or whether the fee should be allocated to separate performance obligations associated with the activities of the location opening (e.g., training, site selection services, etc.), which would be recognized when (or as) those services are performed (i.e., typically up front). Because the allocation of revenue depends on determining whether the goods or services are distinct (which some, all or none may be), as well as determining the standalone selling price for each distinct good or service, the answers may differ from franchisor to franchisor.