Franchisor Accounting Issues
The Financial Accounting Standards Board (“FASB) issued new revenue recognition guidelines that take into effect in 2019 for private companies. The guidelines are applicable to public companies this year. The new guidelines seem to suggest that the initial franchise fee would have to be amortized over the life of the franchise agreement, instead of being recognized upon receipt or when the unit opens for business.
Various franchisor-related organizations, including the IFA, have lobbied the FASB for a different treatment of the franchise fee, based upon the argument that as a practical matter most emerging franchisors use the franchise fee immediately for training, site selection assistance and other support.
The FASB has proposed informally that if the franchise fee is attributable to separate and distinct franchisor performance obligations, such as training and site guidance, then the revenue can be recognized when those services are provided. The FASB is supposed to issue franchise specific examples in September or October of this year to give further guidance to franchisors.