FASB Issues Proposal to Simplify How Private Company Franchisors Evaluate Certain Performance Obligations

 – September 21, 2020
FASB Issues Proposal to Simplify How Private Company Franchisors Evaluate Certain Performance Obligations

Practical Expedient Would Reduce Cost and Complexity for Franchisors Applying Revenue Recognition Guidance

The Financial Accounting Standards Board (FASB) today issued a proposed Accounting Standards Update (ASU) that would provide a practical expedient that simplifies how franchisors would analyze certain activities when determining their performance obligations in a franchise agreement. Stakeholders are encouraged to review and provide input on the proposal by Nov. 5, 2020.

When a business owner (the franchisee) opens a new branch of a franchise, the franchise agreement generally stipulates that the franchisor will support certain pre-opening activities to support the new branch. Those activities may include services such as training or site selection.

The proposed practical expedient would permit certain pre-opening services listed within the guidance to be accounted for as a single bundled, separate performance obligation, if it is probable that the continuing fees in the franchise agreement would be sufficient to cover the franchisor’s continuing costs plus a reasonable profit.