FASB simplifies revenue recognition for private company franchisors

By Ken Tysiac

Private company franchisors will be able simplify their revenue recognition accounting under a standard issued Thursday by FASB.

The new Accounting Standards Update provides a practical expedient that simplifies how private company franchisors analyze certain activities when determining their performance obligations in a franchise agreement.

When a business owner opens a new branch of a franchise, the franchise agreement generally states that the franchisor will support certain pre-opening activities for the benefit of the new branch. Examples of pre-opening activities include training and site selection.

Under the new practical expedient, certain pre-opening services will be permitted to be accounted for as distinct from the franchise license.

FASB also provided an accounting policy election to recognize the pre-opening services as a single performance obligation.

Entities that have not yet adopted FASB's new revenue recognition standard are required to observe an effective date of annual reporting periods beginning after Dec. 15, 2019, and interim reporting periods within annual reporting periods beginning after Dec. 15, 2020.

For entities that already have adopted FASB's revenue recognition standard, the new amendments take effect in interim and annual periods beginning after Dec. 15, 2020, with early application permitted. For those entities, the new guidance is required to be applied retrospectively to the date the new revenue recognition standard was adopted.

Ken Tysiac (Kenneth.Tysiac@aicpa-cima.com) is the JofA's editorial director.

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