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Standards Update: 2/5/21

ASU No. 2021-02, Franchisors – Revenue from Contracts with Customers (Subtopic 952-606): Practical Expedient

The Financial Accounting Standards Board (FASB) has issued Accounting Standard Update (ASU) No. 2021-02, Franchisors – Revenue from Contracts with Customers (Subtopic 952-606): Practical Expedient to address concerns about the complexity of applying Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers to private company franchisors, specifically relating to the amount and timing of revenue recognition for initial franchise fees.


The ASU creates a practical expedient for private company franchisors applying ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). The practical expedient simplifies the identification of certain performance obligations in franchise license agreements, allowing franchisors to account for pre-opening services, as listed in Subtopic 952-606, as distinct from the franchise license and recognize these services as a single performance obligation.

Subtopic 952-606 provides that private company franchisors may account for the following pre-opening services as distinct from the franchise license:

  • Assistance in the selection of a site;
  • Assistance in obtaining facilities and preparing the facilities for their intended use, including related financing, architectural, and engineering services, and lease negotiation;
  • Training of the franchisee’s personnel or the franchisee;
  • Preparation and distribution of manuals and similar material concerning operations, administration, and record keeping;
  • Bookkeeping, information technology, and advisory services, including setting up the franchisee’s records and advising the franchisee about income, real estate, and other taxes or about regulations affecting the franchisee’s business; and
  • Inspection, testing, and other quality control programs.

Previously, under Topic 606, franchisors were required to analyze each pre-opening activity in a franchise agreement and determine whether it represented promised goods or services that were distinct enough to be recognized as a separate performance obligation and had to be analyzed for a determination of standalone selling price, price allocation, and revenue recognition timing. By providing a list of pre-opening services that can be grouped together as a single performance obligation distinct from the franchise license, the FASB’s goal in creating the practical expedient was to lower the cost and time undertaken to analyze the many potential performance obligations that franchise agreements create. However, the practical expedient does not simplify the guidance on allocating transaction price and determining an appropriate standalone selling price for those pre-opening services.

Effective Date and Transition

For entities that have already adopted Topic 606, the practical expedient is effective for annual periods beginning after Dec. 15, 2020, with early application permitted. The expedient must be applied retrospectively to the date Topic 606 was adopted.

Entities that have not yet adopted Topic 606 would apply this practical expedient at the time of Topic 606 adoption.

For questions on how to implement these new accounting standards, please contact your KSM advisor, or complete this form.

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