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Best Practices-New Accounting Rules Are Delayed (Tentatively)

The Financial Accounting Standards Board (FASB) met on April 8, 2020 and agreed to delay the effective date of the modified Rule 606, which changed the way companies recognized revenues. In effect, the extension would be for one year. However, the extended effective date is subject to a fifteen day comment period and final adoption by the FASB.

As we earlier reported, the FASB earlier adopted new rules affecting when companies can or must "recognize" revenues. In the franchise context this means that franchisors may have to not "recognize" (for accounting purposes) initial franchise fees upon the franchise opening, but must recognize it spread over the entire term of the contract.

Franchisors have resisted the change because it makes their balance sheets look less appealing and, in some cases, causes them to lose exemptions from disclosure or state registration requirements. There have also been issues with some auditors not being entirely up-to-date in adopting and applying the revised standard. If the FASB's action becomes final, it may provide some relief to franchisors as they try to navigate their 2020 registration renewals and FDD updates in the middle of the COVID-19 pandemic.

For franchisees, whether the FASB extends the deadline probably has little real impact. One can argue that the "old" rules permitted franchisors to overstate their financial condition. Most franchisor advocates argue to the contrary. Franchisees really need consistency so they can tell whether the franchisor has the financial strength to continue to provide the support and services it promises during the sales process. Regardless of the accounting rules, franchisees need to consult with their accountant or an experienced franchisee lawyer to be certain they understand the financial condition of the franchisor they are looking at investing in as well as understanding the legal and business terms of the contract.

The FASB delay in implementation of the revised revenue recognition rule may prove to be helpful to all parties in that it gives everyone involved in the franchise industry additional time to understand and implement the rule and puts implementation out beyond, at least, round one of the current pandemic. It is probably prudent to assume that, although the new accounting rules are delayed (probably), more likely than not they will only be delayed-not changed.

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