Question:
Briefly describe the guidelines provided by GAAP for the recognition of revenue by a franchisor for an
initial franchise fee.
Answer:
Specific guidelines for revenue recognition of the initial franchise fee are provided by FASB ASC 952–
605–25–1. A key to these guidelines is the concept of substantial performance. It requires that
substantially all of the initial services of the franchisor required by the franchise agreement be performed
before the initial franchise fee can be recognized as revenue. The term “substantial” requires professional
judgment on the part of the accountant. In situations when the initial franchise fee is collectible in
installments, even after substantial performance has occurred, the installment sales or cost recovery
method should be used for profit recognition, if a reasonable estimate of uncollectibility cannot be made.
Briefly describe the guidelines provided by GAAP for the recognition of revenue by a franchisor for an
initial franchise fee.
Answer:
Specific guidelines for revenue recognition of the initial franchise fee are provided by FASB ASC 952–
605–25–1. A key to these guidelines is the concept of substantial performance. It requires that
substantially all of the initial services of the franchisor required by the franchise agreement be performed
before the initial franchise fee can be recognized as revenue. The term “substantial” requires professional
judgment on the part of the accountant. In situations when the initial franchise fee is collectible in
installments, even after substantial performance has occurred, the installment sales or cost recovery
method should be used for profit recognition, if a reasonable estimate of uncollectibility cannot be made.
