FASB offers rev rec guidance for franchisors

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The Financial Accounting Standards Board published a staff paper Monday to help franchisors at private companies implement the revenue recognition standard next year by offering them practical examples.

The FASB staff paper answers questions about the use of judgment in identifying performance obligations under the new revenue recognition standard, which takes effect for privately held companies in 2019. Under the earlier accounting standard, a franchisor usually recognizes an initial franchise fee when a new franchise location opens. That means the franchisor hasn’t needed to assess whether pre-opening services are a separate deliverable. But under the new revenue recognition standard, a franchisor will be required to determine if the pre-opening activities contain any distinct goods or services. To help franchisors transition to the new guidance, the FASB paper describes some educational examples of how a franchisor may make these assessments.

“Stakeholders asked us to clarify how private company franchisors should recognize certain franchise fees when the revenue recognition standard takes effect next year,” FASB Chairman Russell G. Golden said in a statement. “In response to their requests, the FASB staff prepared an educational paper that provides illustrations that should help these stakeholders successfully implement the standard.”

The document is part of FASB’s “Standards That Work” initiative and was developed in consultation with the International Franchise Association.

“The FASB staff paper is one of many examples of how we’re continually monitoring and supporting the successful implementation of our standards,” said Golden. “These efforts are made possible by the valuable input provided by organizations like the International Franchise Association and its members, and we thank them for their assistance in ensuring our standards are, in fact, ‘standards that work.’”

“IFA commends the FASB for working with our members to issue educational resources that illustrate how franchise brands should recognize revenue related to initial franchise fees,” said IFA President and CEO Robert Cresanti in a statement. “This educational material will help accountants accurately apply the standard and contribute to the financial stability of franchise companies.”

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Revenue recognition Accounting standards Franchises Russell Golden FASB