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ASU 2021-02: New Practical Expedient for Non-Public Franchisors When Implementing ASC 606 - Larson And Company

Written by Andrew Wan, CPA, CFE | 19 Dec 2021

ASU 2021-02: New Practical Expedient for Non-Public Franchisors When Implementing ASC 606

Mar 25, 2021

 
With the introduction of ASC 606, franchisors are required to assign a stand-alone selling price to each distinct performance obligation contained within the contracts established with customers. When applying ASC 6060, many franchisors determined that pre-opening service charges previously recognized upfront were hard to value and were presumed that they would not be distinct from the grant of the franchise rights. As a result, such pre-opening service charges were deferred and recognized with the entire franchise term after the adoption of ASC 606. This treatment negatively impacted franchisor’s financial statement positions, as many saw their traditional method of recognizing upfront pre-opening fees being deferred over the term of the franchise agreement, sometimes over decades.

After listening to franchisors’ feedback regarding ASC 606’s impact to their business, in January 2021, the FASB issued ASU 2021-02, Franchisors – Revenue from Contracts with Customers (Subtopic 952-606), to help provide franchisors with some relief. The new ASU provides a practical expedient that simplifies the application of the guidance about identifying performance obligations for franchisors. This practical expedient allows franchisors that are not public business entities to account for pre-opening services provided to a franchisee as distinct from the franchise license if the services are consistent with those included in the predefined list within the guidance, including:

  1. assistance with site selections
  2. assistance in obtaining facilities and preparing the facilities for their intended use, including related financing, architectural, and engineering services, and lease negotiation
  3. training of the franchisee’s personnel or the franchisee
  4. preparation and distribution of manuals and similar material concerning operations, administration, and record keeping
  5. 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 regulations affecting the franchisee’s business
  6. and inspection, testing and other quality control programs

A franchisor that elects this practical expedient should determine whether pre-opening services are distinct from one another, or if it will make an accounting policy election to account for the pre-opening services as a single performance obligation. Disclosure regarding the use of this practical expedient is required. This guidance is effective for reporting periods beginning after December 15, 2019 on a modified retrospective transition or full retrospective transition basis. Early implementation is permitted.

If you have any questions regarding how this new guidance may impact your entity, please reach out to your Larson & Company advisor.

 
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