New FASB revenue recognition standards delayed for franchises
Plans and deadlines across the country are constantly changing due to COVID-19; while it may seem minor, one important change announced by the Financial Accounting Standards Board (FASB - the non-profit entity that sets accounting standards for U.S. companies) this week impacts how franchisors recognize revenue related to advertising funds, franchise fees, and loyalty programs funds. We have previously covered the FASB’s ASC Topic 606, but these standards have not yet been implemented for non-public franchisors. On Wednesday, April 8, 2020, the FASB voted to further delay the implementation of these standards only for non-public franchisors for one year.
These new revenue recognition standards are particularly cumbersome for franchisors, who have recently challenged the difficulty in applying these new revenue recognition rules for franchise fees (which franchisors typically receive as lump sum payments at the beginning of a franchise relationship). The new Topic 606 standards require franchisors to recognize the revenue relating to a franchise fee over the term of the franchise agreement, instead of all at once (i.e., revenue relating to a $10,000 franchise fee for a 10-year franchise agreement should be recognized over ten years, instead of the first year of the franchise). The standards also required the recognition of revenue relating to training and opening the franchise to be delayed until the activity actually takes place. Other revenue streams frequently used by franchisors, like advertising funds and loyalty programs, among other programs, are also impacted by the new standards under Topic 606. Franchisors using loyalty programs must defer a portion of the purchase price on their balance sheets to reflect the value of the loyalty points earned (which will be recognized as income later), and a franchisor must more carefully track the timing of collection and expenditures out of an advertising fund. The new standards require franchisors to accurately account for expenses and collections at the time they are actually incurred during the year, rather than simply reporting the unspent balance (or the loss) on income statements.
This week, the FASB indicated that it would begin a research project to take comments on and evaluate strategies to reduce costs and ease implementation for franchisors preparing for the new Topic 606 revenue recognition standards. FASB Chairman Russell Golden stated that the FASB may be open to further delays of other accounting standards with upcoming implementation dates, given the ongoing COVID-19 crisis. Even though implementation of the Topic 606 revenue recognition standards are delayed for a year, franchisors should continue to work with their advisors on these topics; there is no indication that these standards will be wholly revised or disappear in the months and years to come.