The FASB has issued ASU No. 2021-02, Franchisors—Revenue from Contracts with Customers: Practical Expedient that is intended to ease the accounting burden on private company franchisors. Under Accounting Standards Codification Topic 606, Revenue from Contracts with Customers, (Topic 606), initial franchise fees are typically paid to a franchisor in exchange for establishing the franchising relationship and varying levels of pre-opening services. Under Topic 606, franchisors are required to evaluate the pre-opening activities to determine if they represent any separate performance obligations. If so, the franchisor must determine the appropriate standalone selling price for each of those activities to properly determine the timing and amount of revenue recognition.

Under this practical expedient, a private-company franchisor may account for all pre-opening services as a single, bundled performance obligation, distinct from the franchise license, provided that the pre-opening services are consistent with those included in a predefined list within the guidance. The list of pre-opening services includes assistance in site selection and obtaining and preparing facilities, training, manuals and other materials, quality control programs and other business and advising services.

For entities that have adopted Topic 606, the amendment is effective for interim and annual periods beginning after December 15, 2020 and is to be applied retrospectively to the date Topic 606 was adopted. Early application is permitted. For entities that have not yet adopted Topic 606, the proposed amendment is effective upon transition.

The full text of ASU 2021-02 is available here.

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