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FASB to Defer Rules on Revenue for Franchisors, Lease Accounting

Thomson Reuters Tax & Accounting  

· 5 minute read

Thomson Reuters Tax & Accounting  

· 5 minute read

By Denise Lugo

The FASB on April 8, 2020, voted to propose one-year deferrals on revenue recognition and lease accounting rules for a subset of privately-owned companies and nonprofits, a move sparked by work disruptions companies are facing from the novel coronavirus (COVID-19 crisis.

The decision would defer Topic 606, Revenue from Contracts with Customers, for privately owned franchisors, and Topic 842, Leases, for private companies and not-for-profits (NFPs).

The board also added a research project to its agenda to evaluate how to reduce implementation costs associated with applying Topic 606 to initial franchise fees. Franchisors raised significant concerns about the cost and complexity of adopting Topic 606 as it relates to timing of revenue recognition for initial franchise fees, a FASB staff accountant told the board.

FASB members, in unanimously agreeing to grant the deferrals, said they were sensitive to the revenue issues raised by franchisors, and also recognized lease accounting implementation concerns brought out by the COVID-19 crisis. The novel virus has dislocated accounting staff and has impacted companies’ general transition plans.

“I think in this period of uncertainty for not only the organizations that are applying GAAP but for users of the financial statements looking past the actual numbers and trying to look to the future about the entities, I think it’s important that we have as much stability as possible in the actual financial reporting space, so I feel very strongly deferring,” FASB member Marsha Hunt said. “This is not the right environment in which to be introducing change which brings with it risk of implementation issues. And also I think its more supportive of all entities if we could take this off their plate so that they can focus on their operational concerns right now.”

The proposal will be issued in coming days for a 15-day comment period, the board said.

Date Specifics

Accounting Standards Update (ASU) No. 2014-09Revenue from Contracts with Customers (Topic 606), published in 2014, took effect in 2018 for public companies, and 2019 for private companies. This standard replaces a plethora of industry-specific revenue guidance with a principles-based five-step model for reporting revenues earned from customer contracts.

Because the guidance is effective for annual reporting periods (not interim), private companies are currently in the midst of adopting the guidance and the audit of their first set of financial statements under Topic 606 is in process for many companies.

The board decision means that for franchisors that are not public business entities, the revenue rules will be amended to annual reporting periods beginning after December 15, 2019, and interim reporting periods within annual reporting periods beginning after December 15, 2020. The board decided to make the amendment optional.

ASU No. 2016-02Leases (Topic 842), issued in 2016, took effect in 2019 for public companies, and November 2019 was deferred to 2021 for private companies. It requires companies to report—for the first time—the full magnitude of their long-term lease obligations on the balance sheet.

The change means the leases standard will be amended for private companies and private not-for-profit entities to annual reporting periods beginning after December 15, 2021, and to interim periods within fiscal years beginning after December 15, 2022.

The rules will also be amended for nonprofit entities that have issued or are conduit bond obligors for securities that are traded, listed, or quoted on an exchange or an over-the-counter market (public NFPs) and which have not yet issued financial statements. For these entities, the rules will change to take effect for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption will continue to be permitted.

“With respect to leases I recognize that with the dislocation that’s occurring the need to divert resources,” FASB Chairman Russell Golden said. “There is a need to defer leases by one year in my mind, both with private companies as well as those not-for-profit conduit borrowers that have not issued their financial statements. It is that subcategory that I think is driving the need to do this in a timely manner as a lot of them have a 6/30 year end and a lot of those entities are universities and hospitals and I think the deferral will go along way.”


This article originally appeared in the April 9, 2020 edition of Accounting & Compliance Alert, available on Checkpoint.

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