Private Franchisor Revenue Help Coming
FASB plans to issue a proposal in early September to provide some relief from the new revenue rules in Accounting Standards Codification (ASC) 606 for nonpublic franchisors.
An initial franchise fee (IFF) is a fee paid to a franchisor in exchange for establishing a franchise relationship, along with the provision of some startup services. This fee is typically paid in a lump sum to the franchisor when a franchise agreement is signed. Before ASC 606, under Topic 952, Franchisors, the IFF is recognized when the franchise location opens. Under ASC 606, the franchisor must first determine if the pre-opening activities contain any distinct goods or services before establishing the timing of revenue recognition. If an item is not distinct, then the associated revenue would be recognized over the franchise license term, which would result in a significant change in timing compared to current accounting practice.
The planned proposal would add a practical expedient to simplify the judgments needed in determining whether a good or service is distinct. A franchisor that is not a public business entity may elect the practical expedient to account for initial services as a single performance obligation if:
- Those services are the same as those included in a pre-defined list of services
- It is probable that the continuing fee will cover the cost of the continuing services provided by the franchisor with a reasonable profit
The revenues on the single performance obligation would be recognized at the point in time when the obligation is satisfied. Disclosure would be required if this optional practical expedient is elected.
BKD will continue to follow this developing situation. If you have questions about these changes, contact your BKD Trusted Advisor™ today.