BDO Knows: FASB - June 2017

June 2017

Restaurant_pic-x675.jpg

On May 28, 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (ASC 606), which provided new guidance for recognizing revenue for contracts with customers and is poised to change the way restaurant franchisors recognize their revenue.  

Under current revenue guidance, a franchisor would recognize the revenue from the initial franchise fee upon evidence of completion of all initial obligations (e.g., training, site selection). Generally, the opening of the store was the best indication that these obligations had been satisfied. The royalty, of course, is recognized as the restaurant's sales took place over the period the restaurant's operation.

However, ASC 606 indicates that the franchise right is a distinct performance obligation that transfers over time and, therefore, any portion of the initial franchise fee that is allocated to the franchise right should be recognized over the course of the contract term. This conclusion results from the fact that the franchise license derives its value from the past and ongoing activities of the franchisor, such as branding and marketing activities. There is no change to accounting for the royalty fees; they will continue to be recognized as the related sales occur.

Although in most cases the upfront franchise fee (and, by extension, any area development fees) will now generally be recognized over the term of the franchise license, the new standard retains the requirement to defer any broker fees paid in relation to entering into the franchise license, and requires them to be amortized generally over the same period.  

For a more in-depth understanding of the new standard and the impacts it will have on restaurant franchisors, franchisees and owners/operators, download our newsletter below.

Download Newsletter
 

For questions related to matters discussed above, please contact: 
 
Angela Newell
National Assurance Partner
  Jay Duke 
Managing Partner and Leader of BDO's National Franchise Practice

  
Dustin Minton 
Assurance Partner and Co-Leader of BDO's National Restaurant Practice
  Alan Stevens 
Assurance Partner