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

Norwalk, CT - The Financial Accounting Standards Board (FASB) 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 November 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.

The proposed ASU is available at www.fasb.org