In September 2020, the FASB issued an Exposure Draft for public comment that is intended to ease the potential accounting burden on private company franchisors. Under ASC 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 those activities to properly determine the timing and amount of revenue recognition.

Under the proposed practical expedient, a franchisor may account for pre-opening services as a single bundled, separate performance obligation, provided that a) the pre-opening services are consistent with those included in a predefined list within the guidance, and b) it is probable that the continuing fees in the agreement would be sufficient to cover the franchisor’s continuing costs plus a reasonable profit. 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 advising services.

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

The comment deadline for the Exposure Draft is November 5, 2020. The full text of the Exposure Draft is available here.

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