FASB Guidance on ASC 606: Combining Pre-Opening Obligations for Revenue Recognition Purposes

By Jarina D. Duffy

On December 11, 2020, the Financial Accounting Standards Board (FASB) voted to adopt a “practical expedient” for private franchisors in order to help them identify performance obligations for the purposes of revenue recognition. Specifically, the practical expedient permits private franchisors to account for certain pre-opening services provided to a franchisee as a single, separate performance obligation if the services are included in a pre-defined list and certain other conditions are met.

Specifically, the guidance provides that a franchisor may account for the following pre-opening services as a single performance obligation:

  • Assistance in the selection of a site;
  • Assistance in obtaining facilities and preparing the facilities for their intended use, including related financing, architectural, and engineering services, and lease negotiation;
  • Training of the franchisee’s personnel or the franchisee;
  • Preparation and distribution of manuals and similar material concerning operations, administration, and record keeping;
  • Bookkeeping, information technology, and advisory services, including setting up the franchisee’s records and advising the franchisee about income, real estate, and other taxes or about local regulations affecting the franchisee’s business; and/or
  • Inspection, testing, and other quality control programs.

For example, if a franchisor provides a training program and assists with site selection, instead of parsing out the transaction price for these two pre-opening obligations, the franchisor may (because these two obligations are covered in the list above) instead consider them as one “pre-opening obligation” and, therefore, only one transaction price.

If a franchisor has already implemented the rules of ASC 606, then the new practical expedient is effective as of December 15, 2020, but early application is permitted. If a franchisor has not yet implemented the rules of ASC 606, then the existing transition provisions and effective date in ASC 606-10-65-1 are required (transition period with an effective date of annual reporting periods beginning after December 15, 2019, and interim reporting periods within annual reporting periods beginning after December 15, 2020). If a franchisor chooses to use the practical expedient, it must disclose that it has.

The final standard is expected to be completed by FASB by the end of the first quarter of 2021. We intend to update this blog post when the final standard is completed.

If you would like to discuss how the practical expedient may affect your business, and/or any other topics regarding revenue recognition, please contact me at jarina.duffy@kentfranchiselaw.com or 610-205-6061.

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