IMA Financial Reporting Committee and Small Business Committee comment letter on Proposed Accounting Standards Update (ASU) No 2020-600 FranchisorsRevenue from Contracts with Customers (Subtopic 952-606) Practical Expedient

The IMA Financial Reporting Committee and Small Business Committee (Committees) issued a joint comment letter in response to the FASB’s exposure draft, Proposed ASU No. 2020-600, Franchisors—Revenue from Contracts with Customers (Subtopic 952-606): Practical expedient. This proposed guidance, if adopted, would permit non-public franchisors to account for pre-opening services provided to a franchisee, under certain conditions, as a single performance obligation. In effect, this may allow for upfront recognition of certain initial franchise fees.

In their comment letter, the Committees note that although they support the FASB’s simplification initiatives, particularly for private entities, they have multiple points of concern about this proposal. They view the proposal as industry-specialized, which the adoption of principles-based Topic 606, Revenue from Contracts with Customers, was intended to avoid. Citing the recognition policies of several major public franchisors, the Committees note that in most franchise relationships, pre-opening services are not “distinct” as defined in Topic 606, nor are they recognized upfront. To achieve the simplification that the FASB seeks, the Committees suggest that the Board reconsider the optional deferral and amortization method proposed by the FASB’s dissenting members.