ASC

ASC 606-952

Franchisors

606 Revenue from Contracts with Customers

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In brief

IntermediateRevenueRecognitionDisclosureIndustry-specific

This subtopic gives franchisors that are not public business entities a practical expedient for identifying performance obligations under Topic 606. Rather than applying the general distinct analysis to the franchise license, a private franchisor may treat listed pre-opening services (site selection, facility assistance, training, manuals, bookkeeping/IT/advisory, quality control) as distinct from the franchise license, and may further elect as an accounting policy to treat all such pre-opening services as a single performance obligation. The expedient affects only step 2 of the model; allocation of transaction price and timing of recognition still follow Topic 606.

Key points (7)
  • Revenue is recognized under Topic 606; this subtopic only provides a practical expedient (952-606-25-1).
  • A franchisor may account for the six categories of pre-opening services listed in 952-606-25-2 as distinct from the franchise license.
  • If the expedient is elected, the franchisor still applies 606-10-25-19 through 25-22 to determine whether the pre-opening services are distinct from one another, unless it makes an accounting policy election to treat them as a single performance obligation (952-606-25-3).
  • The expedient applies only to identifying performance obligations and must be applied consistently to contracts with similar characteristics and in similar circumstances; allocation and recognition follow Topic 606 (952-606-25-4).
  • If the expedient is not elected, or the services do not match the list, the franchisor applies the general Topic 606 performance obligation guidance (952-606-25-4).
  • A public business entity shall not apply this guidance, and entities outside its scope may not apply it directly or by analogy (606-952-15-2).
  • Election of the practical expedient and of the single-performance-obligation policy must each be disclosed (952-606-50-1 through 50-2).

For students. Exam traps: the expedient is available only to non-public franchisors and only for step 2 (identifying performance obligations)—it does not change transaction price allocation, the sales-based royalty constraint, or the timing of revenue recognition. Also note the two separate elections (the expedient itself, and the single-performance-obligation policy), each with its own disclosure requirement.

franchise licensepre-opening servicespractical expedientperformance obligation identificationdistinct goods or servicesaccounting policy electionsales-based royaltynon-public business entity

Machine-generated study aid for ASC 606-952. Check the source paragraphs below.

606-952-00Status

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606-952-05Overview and Background

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606-952-05-1
This Subtopic addresses a practical expedient for revenue recognition for a franchisor that is not a public business entity.

606-952-15Scope and Scope Exceptions

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606-952-15-1
This Subtopic follows the same Scope and Scope Exceptions as outlined in the Overall Subtopic, see Section 952-10-15.
606-952-15-2
A public business entity shall not apply the guidance in this Subtopic. Entities that are not within the scope of this Subtopic shall not apply the guidance in this Subtopic directly or by analogy.

606-952-25Recognition

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606-952-25-1
Revenue shall be recognized in accordance with Topic 606, Revenue from Contracts with Customers.
606-952-25-2
As a practical expedient, when applying the guidance in Topic 606, a franchisor that enters into a franchise agreement may account for the following pre-opening services as distinct from the franchise license:
  1. a
    Assistance in the selection of a site
  2. b
    Assistance in obtaining facilities and preparing the facilities for their intended use, including related financing, architectural, and engineering services, and lease negotiation
  3. c
    Training of the franchisee's personnel or the franchisee
  4. d
    Preparation and distribution of manuals and similar material concerning operations, administration, and record keeping
  5. e
    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
  6. f
    Inspection, testing, and other quality control programs.
606-952-25-3
A franchisor that elects the practical expedient in paragraph 952-606-25-2 shall apply the guidance in paragraphs
606-10-25-19 through 25-22
to determine whether the pre-opening services are distinct from one another unless it makes an accounting policy election to account for the pre-opening services as a single performance obligation.
606-952-25-4
The practical expedient in paragraph 952-606-25-2 applies only to identifying performance obligations. An entity shall apply this guidance consistently to contracts with similar characteristics and in similar circumstances. An entity should see Topic 606 for guidance on the remaining aspects of recognizing revenue from contracts with customers, including allocating the transaction price and recognizing revenue. If an entity elects not to apply the practical expedient or if the services performed are not consistent with the list in paragraph 952-606-25-2, the entity shall apply the guidance in Topic 606 on identifying performance obligations.

606-952-50Disclosure

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606-952-50-1
If an entity elects to use the practical expedient in paragraph 952-606-25-2, the entity shall disclose that fact.
606-952-50-2
An entity that makes the accounting policy election to recognize pre-opening services as a single performance obligation as described in paragraph 952-606-25-3 shall disclose that fact.

606-952-55Implementation Guidance and Illustrations

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Illustrations

606-952-55-1
An entity enters into a contract with a customer and promises to grant a franchise license to open a restaurant location. The franchise license term is 10 years. In addition to the license, the entity also promises to provide two services related to the opening of the franchise location—site selection and training. The entity receives a fixed fee of $25,000, as well as a sales-based royalty of 5 percent of the customer's sales for the term of the license. The fixed consideration of $25,000 is payable on or before the opening of the restaurant location.
606-952-55-2
The entity first assesses whether it is eligible for the practical expedient for identifying performance obligations in paragraph 952-606-25-2. The entity determines that it is eligible because it is not a public business entity, it is a franchisor that is within the scope of Topic 952, and it has entered into a franchise agreement with a customer.
606-952-55-3
In applying the practical expedient, the entity compares its pre-opening services (training and site selection) to the list of services in paragraph 952-606-25-2 instead of applying the guidance in paragraph 606-10-25-19. The entity determines that those services may be accounted for as distinct from the franchise license because they are consistent with the list of services in paragraph 952-606-25-2. The entity makes an accounting policy election to account for all pre-opening services that are consistent with the list in paragraph 952-606-25-2 as a single performance obligation. Therefore, the entity determines that it has two performance obligations—a franchise license and pre-opening services.
606-952-55-4
The entity then applies the guidance in paragraphs
606-10-32-28 through 32-45
to allocate the transaction price to the performance obligations and the guidance in paragraphs
606-10-25-23 through 25-37
and 606-10-55-65 through 55-65B to determine when and how to recognize revenue for satisfaction of the performance obligations.
606-952-55-5
The entity discloses its use of the practical expedient and its accounting policy election to treat the pre-opening services as a single performance obligation in accordance with the disclosure requirements in paragraphs
952-606-50-1 through 50-2
.

606-952-65Transition and Open Effective Date Information

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606-952-65-1
Paragraph superseded on 12/14/2022 after the end of the transition period stated in Accounting Standards Update No. 2021-02, Franchisors—Revenue from Contracts with Customers (Subtopic 952-606): Practical Expedient.

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