On January 28, 2021, the Financial Accounting Standards Board (FASB) published an accounting workaround to the complicated revenue recognition rules for private franchise businesses. The updated guidance will provide a simpler way for franchisors to account for revenues gleaned for helping franchisees to set up shop.
The details
Accounting Standards Update (ASU) No. 2021-02, Franchisors — Revenue from Contracts with Customers: Practical Expedient, introduces a practical expedient to Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers. A practical expedient is an alternative aimed at producing a more cost-effective way of achieving the same or a similar accounting objective.
The updated standard will allow private franchisors to immediately recognize as revenue a portion of upfront fees they charge for preopening services, such as training and site feasibility studies, to support the opening of a new franchise location. Under the new guidance, initial franchise fees will be recognized as a single performance obligation if they’re consistent with those included in a predefined list in the guidance.
ASU No. 2021-02 amends revenue recognition rules to reduce the cost and complexity of applying the second step of the revenue recognition model — identifying performance obligations — to preopening services for franchisors. This step requires companies to determine whether goods or services transferred to customers are separate performance obligations. Some accountants have said that this part of the model is difficult and costly for private franchisors to apply.
Dissenting opinions
The updated standard wasn’t endorsed by the full board. Three of the seven FASB members wrote a joint dissent to state that the new rules won’t improve U.S. Generally Accepted Accounting Principles. They believe that the expected benefits don’t justify the costs.
Among other reasons for their dissent is that applying a one-size-fits all approach violates a core principle of Topic 606. That principle states, “An entity shall recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services provided by the entity.”
In addition, the dissenters expressed concerns that the new rules would introduce divergence in applying the revenue recognition guidance among public and nonpublic franchisors, as well as for similar transactions across various industries. This outcome would contradict one of the main reasons why the revenue recognition guidance was created.
Need help?
Despite the dissenters’ concerns, these narrow-scope changes are welcomed by privately held franchisors. For companies that haven’t yet adopted the new revenue recognition model, ASU No. 2021-02 applies to annual periods after December 15, 2019, and interim periods within annual periods after December 15, 2020. For those that have already adopted the new revenue recognition model, ASU No. 2021-02 is effective for annual and interim periods after December 15, 2020. Early application is permitted. Contact your CPA for more information.
© 2021