What You need to know
A challenge in Franchisor accounting is the complex industry-specific guidance for revenue recognition. In response to the challenge, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) developed the Revenue recognition ASC 606 standards. The goal of the new accounting standard is to provide a single model for revenue recognition in franchising.
What’s ASC 606 Franchise Revenue Recognition
ASC 606 is an accounting standard that specifies how franchises and businesses that enter into contracts with customers recognize revenue. ASC 606 standard recognizes a contract as a series of distinct performance obligations and simplifies investors’ and consumers’ understanding of financial statement results across industries.
When May a Franchise Recognize Revenue?
A Franchise might recognize revenue when it meets the terms of intellectual property licenses, royalties, and site selection obligation agreements. However, under the amended ASC (952-606): Practical expedient, the franchisor can recognize certain reopening services as separate from the agreement.
The updated rules include site selection services, training franchisee personnel, inspections, and other quality control.
How Do You Recognize Revenue Under ASC 606? (5-step process of franchise revenue recognition ASC 606)
To simplify the complexity of ASC 606, FASB created a 5-step approach to recognize revenue. They are;
1. Identify the contract with the consumer.
2. Identify the performance obligations in the contract
3. Determine the transaction price
4. Allocate the transaction price
5. Recognize revenue when or as the entity satisfies a performance obligation.
Next Steps
The franchise revenue recognition ASC 606 standard is a complex system that requires professional guidance. Hiring a professional will help you to simplify the process, remain compliant, and meet implementation requirements. Contact us to help you implement the ASC 606 Franchisor revenue recognition for your Business.
