Financial Accounting Standards Board (FASB)

On December 9th, 2020, the Financial Accounting Standards Board (FASB) approved to adopt a “practical expedient” for private franchisors. in a 4-3 vote. This was a major win for IFA members as the 'practical expedient' intends to facilitate reducing the cost and complexity of applying Topic 606 to initial franchise fees for franchisors that are not public business entities. This comes as the result of IFA’s multi-year advocacy effort on revenue recognition accounting rules for private franchisors.

FranDATA estimated if not amended, the original version of FASB’s “revenue recognition” standard would have significantly harmed the franchise sector (in particular, emerging brands), with up to 930 brands going bankrupt within the first three years of the original rule going into effect.

Background

In 2016, FASB issued Topic 606 that changed revenue recognition rules, which indirectly required franchise brands to collect franchise fees over the term of a franchise agreement. Historically, franchise brands have been allowed to immediately recognize the initial franchise fees earned from incoming franchisees, which average $36,000. Particularly for emerging brands, the recognition of this income is critical to the financial stability of these companies that are growing their business.

In 2018, IFA worked directly with FASB to clarify the rules for franchisors and allow for the recognition of a portion of initial franchise fees, such as for site selection and training. Majority of IFA emerging brands were unable to recognize a portion of their initial franchise fees, and for those who had found some success, the process has been overly burdensome, requiring hundreds of hours of analysis and significant resources to achieve minimal success. There is also a significant cash flow issue that is critical to the survival of small business emerging brands.

In 2019, private companies were required to comply with the Financial Accounting Standards Board (FASB)’s new ASC 606 revenue recognition standards, requiring franchise brands to amortize their initial fees over the life of the franchise contract. For example, if a franchise brand receives $36,000 from a new franchise owner, the brand would have to amortize the fee over the ten-year agreement, providing the brand with only $3,600 in cash per year.

In our continued discussions with FASB, IFA emphasized the need for permanent relief for private sector franchisors, in particular. On April 21, 2020, IFA submitted a public comment in support of FASB’s proposed Accounting Standards Update to allow an extra year to implement Topic 606 for private franchisors while the Board evaluates a simplified process to reduce costs for small businesses and income derived from initial franchise fees. IFA continued to discuss this ongoing issue with our allies in Congress and the Administration. On May 12, 2020, Congressman Brad Sherman, Chairman of the Investor Protection and Capital Markets Subcommittee, led a bipartisan letter to FASB in support of allowing private franchisors the ability to immediately recognize a portion of the their initial franchise fees.

See below for more information about certain activities with FASB and the Congress, and direct any questions to Suzanne Beall, Vice President of Government Relations & Public Policy and Counsel, at [email protected].