Revenue for franchisors
Industry Supplement | April 2021
Latest edition: Our guide to the implementation of ASC 606 for franchisors.
This April 2021 edition expands on our existing ASC 606 guidance for franchisors to incorporate insights on the adoption of ASU 2021-02, which simplifies how private company franchisors analyze certain activities when determining their performance obligations in a franchise agreement.
Applicability
ASU 2021-02, Franchisors – Revenue from Contracts with Customers (Subtopic 952-606)
- Companies with franchisor operations
Relevant dates for the adoption of ASC 606
| Effective date | Public business and certain other entities* | Other entities that had not issued (made available for issuance) financial statements as of June 3, 2020** |
|---|---|---|
Annual periods – Fiscal years beginning after | Effective | Dec. 15, 2019 |
Interim periods – In fiscal years beginning after | Effective | Dec. 15, 2020 |
Early adoption allowed in fiscal years beginning after | Dec. 15, 2016 | |
* (1) public business entities; (2) not-for-profits that have issued, or are conduit bond obligors for, securities that are traded, listed or quoted on an exchange or an over-the-counter market; (3) employee benefit plans that file financial statements with the SEC; and (4) other entities that issued (made available for issuance) financial statements reflecting the adoption of Topic 606 before June 3, 2020. | ||
** ASU 2020-05 deferred the effective date for those specific other entities by one year. | ||
Relevant dates for the adoption of ASC 2021-02
| Nonpublic business entities | Effective dates |
|---|---|
Franchisors that have adopted Topic 606 | Annual and interim reporting periods after December 15, 2020 |
Franchisors that have not yet adopted Topic 606 | Apply transition provisions and effective dates for Topic 606 above, using the full retrospective method |
Key impacts
- Entirely new accounting model that may affect the timing of revenue recognition, in particular for upfront fees
- Sales-based royalties will usually be recognized when franchisee sales occur
- Performance obligations are the new unit of account. Upfront activities and ongoing goods or services to franchisees may be affected
- Accounting for advertising fund contributions and expenses will change for most franchisors
- New framework for assessing franchise contracts modifications and transfers
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