Surprise! On April 8th, FASB delayed for one year the implementation of the new ASC 606 revenue recognition standards for private companies, citing the coronavirus pandemic. In addition to delaying implementation, FASB indicated it would investigate “how to reduce implementation costs relating to applying Topic 606 to initial franchise fees.” While the connection between implementation of the amended standard and the pandemic may be inexplicable, FASB’s reconsideration of ASC 606 is welcome news to franchisors.
The delay does create a bit of a conundrum, however. It’s renewal season, and many franchisors have already adopted the new ASC 606 standard; others have not. So, what will states accept as GAAP-compliant financial statements this year? Are both pre- and post-amended ASC 606 statements acceptable? Does the answer vary from state to state? Must financials disclose the specific approach to revenue recognition? The timing of FASB’s decision may deprive most franchisors from taking advantage of the extra year’s transition.
The Cliff Notes version of ASC 606 revenue recognition
When FASB first announced the revised recognition standard for revenues derived from customer contracts (ASC 606) in 2016, franchisors energetically voiced opposition. The revised standard required franchisors to delay recognition of certain initial income from the sale of franchises. At the extreme, the standard appeared to require recognition of the entire initial franchise fee over the life of the franchise. The disproportionately negative impact on the start-up and smaller franchisors is undeniable.
However, FASB reacted to the strong voice of franchising and twice issued updates addressing the application of the new standards in franchise companies. On November 5, 2018, FASB issued an update clarifying the recognition of upfront franchise fees. Specifically, the Board explained that the initial franchise fee can be recognized immediately if the fee is “distinct” from franchisor’s pre-opening obligations (e.g, training), which are subject to deferred recognition. Asserting that all initial fees are distinct from performance obligations is likely to spark intense scrutiny by regulators. Then, amidst all the intensity of renewal season and finalizing financials, came the FASB’s decision to delay implementation for private companies.
FASB’s concern for the expense of implementing the revised standards in its April 8th meeting is welcome news. Under present FASB guidance, regulators expect to see:
- An explanation of the method of adoption, whether full or retrospective
- If a modified retrospective is adopted, the cumulative catch up to retain earnings in disclosure and table form
- For initial franchise fees, a discussion of the five step process to revenue recognition and
- A disclosure as to whether the initial franchise fees are recognized upfront or over the term of the franchise agreement.
These are expensive and complicated changes! Indeed, the AICPA published a recommended schedule, detailing a year-long process of implementation. Adoption is not a simple matter.
The Hobbesian choice . . . or, damned if you do and damned if you don’t
So where’s the problem? Why shouldn’t FASB’s announcement be met with universal glee? Because we’re in renewal season, and most franchisors have already implemented the revised ASC 606 standards. Prior to April 8th, GAAP mandated revenue recognition consistent with the new standards. It was only after April 8th that compliance by private companies became optional for this reporting period. Usually the hare beats the tortoise, but sometimes it pays to wait. In this case, franchisors who have procrastinated may have (unknowingly) placed a good bet; if the FASB revises the procedures for implementation, the expense of implementation may decrease.
What form of GAAP compliant financials will be accepted this year? There is no clear cut answer. Because FASB only delayed implementation but did not substantively change the ASC 606 standards, renewals filed by franchisors before April 8th reflecting the new revenue recognition standards should be deemed GAAP compliant; even anecdotally, no state regulator has indicated that financials complying with ASC 606 standards must be restated to prior (legacy) standards. For a similar reason, if a franchisor is in an ongoing renewal process (e.g., renewal filed before April 8th but not yet complete), it’s logical that compliance with the new standards is a necessity. Although it defies logic, private entity franchisors that have adopted the new standards could, if they wished, revert to legacy revenue recognition standards via a pre- or post- effective or renewal filing.
In this case, procrastination pays off, and private entity franchisors that have yet to adopt the new revenue recognition standards are poised for instant gratification. When they are finally forced to adopt the ASC 606 standard, FASB may have developed a less burdensome and less costly process. At least, that’s what FASB’s announcement seems to promise.
The tortoise wins this race.
 The new standard became effective for fiscal years beginning after 12/15/2017 for public companies, and was scheduled for implementation by private companies for fiscal years beginning after 12/15/2018. The new implementation date for private companies is fiscal years beginning after 12/15/2020; the implementation date for public companies was not changed.
 The AICPA October 2018 publication, directed to implementation by public entities, is titled “New Revenue Recognition Accounting Standard – Learning and Implementation Plan”