Good news for privately-owned franchisors! On January 28, 2021, the Financial Accounting Standards Board (FASB) released Accounting Standards Update (ASU) 2021-02 to Topic 606, a long-awaited expedient which is intended to reduce some of the cost and complexity of applying Topic 606 in determining revenue recognition with regard to pre-opening services provided by franchisors.
The FASB issued this expedient to clear up the misconceptions that pre-opening costs would not be distinct from the license of the term and that the initial franchise license fee would always be recognized over the license term rather than applying the Topic 606 model to identify performance obligations. Applying the simplified expedient will result in accounting outcomes generally consistent with the intent of Topic 606.
For the past two and half years, the International Franchise Association (IFA) FASB Task Force (of which Citrin Cooperman is a member), worked very closely with the FASB to address the concerns of the franchise industry, especially those of emerging franchisors.