FASB simplifies revenue recognition guidelines for franchises

The Economical Accounting Expectations Board launched an accounting standards update Thursday, supplying franchisors a practical expedient way to identify their overall performance obligations less than a franchise settlement.

The update addresses some of the fears of personal franchise firms about the difficult earnings recognition policies. When a franchisee opens a new branch of a franchise, the franchise agreement normally stipulates that the franchisor will help some of their pre-opening actions to assistance the new department. Those people functions could include expert services these kinds of as education or web-site selection. The sensible expedient will allow certain pre-opening companies to be accounted for as unique from the franchise license.

FASB has been doing the job to simplify lots of of its requirements for private corporations, in consultation with its sister business, the Non-public Enterprise Council. Past September, it issued a proposed accounting benchmarks update to present franchise enterprises a sensible expedient to its difficult profits recognition principles (see tale). The Intercontinental Franchise Association has been pushing FASB for variations to the profits recognition principles and succeeded in successful a hold off of the typical previously previous 12 months for private franchises as part of a larger deferral of several accounting standards in reaction to the COVID-19 pandemic (see tale).

FASB acknowledged that it made a decision to undertake the undertaking to handle the challenges elevated by stakeholders who expressed concerns about the degree of energy expected to account for pre-opening companies by private corporation franchisors when seeking to comply with the 2014 revenue recognition standard, also identified as Matter 606.

“The board also grew to become anxious that some entities that are not community company entities presumed that the pre-opening companies would not be distinct from the franchise license and that the original franchise rate would usually be regarded around the license term alternatively than making use of the Topic 606 model to detect effectiveness obligations,” mentioned FASB.