Franchise Times is reporting that the Financial Accounting Standards Board (FASB) has now provided clarity to the upcoming standard for recognizing license fee revenue. The new standard categorizes franchise licenses as “symbolic” licenses with a single performance obligation, thereby requiring initial franchise fees to be amortized over the entire life of the license. For franchisors, this standard has been a troublesome prospect due to confusion of whether certain pre-opening services — such as site selection assistance, equipment, and training — constitute “distinct performance obligations” which allow a portion of franchise fee revenue to be recognized at the time those services are provided. The Board’s new guidance answers that question and establishes that multiple performance obligations may exist early in the development stages.
This is great news for new and emerging franchisors who have been concerned about the financial impact of the new standard. What remains now is careful individual consideration of all pre-opening obligations to ensure they are distinct performance obligations which will allow early recognition of revenue.
David L. Pratt II is a franchise and brand expansion attorney with DL PRATT, PC. Like all posts made on this blog, this posting is solely for informational purposes and is in no way intended to be, or to be interpreted or construed as, legal advice or as creating an attorney-client relationship.