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Oregon Office:

Douglas D. Smith

22021 SW Sherwood Boulevard 

PO Box 1034

Sherwood, Oregon 97140-1034

Phone: (503) 840-0000

 

Utah Offices:

Bradley D. Smith

FranchiseSmith Utah, LLC

5508 West Kensington Circle

Highland, Utah 84003

Phone: (801) 615-1564

 

Douglas D. Smith

Franchise Smith, LLC

201 Red Pine Drive #4

Alpine, Utah 84004-5618

Phone: (503) 840-0000

 

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New FASB/GAAP Accounting Rules Impact Financial Reporting and Condition in 2019

April 19, 2018

On January 1, 2019, franchise companies will be subject to new Financial Accounting Standards Board (“FASB”) rules about how to treat franchise system revenues under Generally Accepted Accounting Principles (“GAAP”). The new FASB rules determine how a franchisor’s audited financial statements handle initial franchise fees, training fees, equipment and inventory sales, royalty fees, etc.

Every franchisor should counsel now with its accountants and auditors to determine how these new FASB rules will impact preparations for 2019: 

Starting in 2019, franchisors must divided license fees into two separate classes:

  1. “Functional,” such as a license to use a proprietary POS system; and
  2. “Symbolic,” such as an initial fee or a royalty fee for use of the trademarks and for franchise system training and maintenance the franchisor provides.  

Currently, most franchisors recognize the payment of franchise fees upon receipt or when the applicable item or service is rendered. For example, most often the majority of income from an Initial Franchise Fee drops to the bottom line when the franchise opens and begins doing business.

These new FASB principles may require a franchisor to recognize initial franchise fees and some other initial payments as revenue apportioned over the term of the franchise agreement. So, rather than a large revenue increase upon a franchise opening, the franchisor may have to amortize that revenue in smaller pro rata allocations over the duration of the agreement. This means a slower income stream and significantly different financial statements. States that review financial statements as part of the franchise registration process may impose new or different financial assurance requirements on new and renewing applications.

All of this argues for shorter franchise terms (1 to 5 years rather than 10), perhaps balanced by “ever-green” (unlimited) or automatic renewals; and potentially for new, different, or innovative allocation of prices and fees.




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