FASB proposes to simplify revenue recognition for franchisors

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The Financial Accounting Standards Board released a proposed accounting standards update Monday to offer a practical expedient to the current revenue recognition rules for franchise businesses to help them analyze some activities when determining their performance obligations in a franchise agreement.

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

FASB’s proposed practical expedient would allow 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.

The International Franchise Association has been pushing FASB for changes to the revenue recognition rules and succeeded in winning a delay of the standard earlier this year for private franchises as part of a larger deferral of various accounting standards in response to the COVID-19 pandemic (see story).

FASB is asking for comments on the proposal by Nov. 5, 2020.

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Revenue recognition Accounting standards FASB Franchises Small business