FASB Simplifies How Private Company Franchisors Evaluate Certain Performance Obligations

The FASB has issued Accounting Standards Update (ASU) No. 2021-02, Franchisors—Revenue from Contracts with Customers (Subtopic 952-606): Practical Expedient, that provides a practical expedient that simplifies how private company franchisors evaluate certain activities when determining their performance obligations in a franchise agreement. This practical expedient should reduce cost and complexity for franchisors applying revenue recognition guidance.

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 practical expedient permits certain pre-opening services listed within the guidance for private company franchisors to be accounted for as distinct from the franchise license.

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