DearColleague.us

Letter

Brad Sherman

From the office of:

Brad Sherman

Sending Office: Honorable Brad Sherman
Sent By:
Robert.Robilliard@mail.house.gov

        Request for Signature(s)

Dear Colleague,

Please join me in encouraging the Financial Accounting Standards Board (FASB) to provide small private franchisors with alternative simplified accounting standards for the accounting of franchisee fee revenue.

On April 8, in response to the coronavirus crisis, FASB announced that it would delay implementation of Accounting Standards Codification (ASC) Topic 606 for private companies.  ASC 606 revises U.S. Generally Accepted Accounting Principles by changing the
way companies report revenue from contracts with customers.  Today, large publicly traded franchisors comply with ASC 606. However, since FASB announced ASC 606 in 2016, small private franchisors have struggled to implement the change, specifically with respect
to the accounting of revenue from franchisee fees.

In 2018, FASB issued guidance, in the form of a staff paper, specifically intended to address the unique challenges franchisors face in applying ASC 606.  However, many franchisors have continued to struggle with effectively implementing ASC 606. In light
of these challenges and the current crisis, on April 8, FASB voted unanimously to delay ASC 606 for private franchisors “to evaluate how to reduce implementation costs.”

Given the current economic strain on so many small businesses, I am strongly supportive of this effort by FASB. Further, I am recommending that FASB adopt a simplified alternative accounting standard for private franchisors that is consistent with the 2018
guidance but easier to apply. In at least four previous instances FASB has provided similar accounting alternatives to private companies.

The deadline to sign on to this letter is Monday, May 4, at 5:00 pm.

If you have any questions or would like to sign on, please contact Rob Robilliard (Robert.Robilliard@mail.house.gov) in my office. Thank you for your consideration.

Sincerely,

 

BRAD SHERMAN
Member of Congress

_____

 

May 5, 2020

 

Russell Golden
Chairman
Financial Accounting Standards Board
401 Merritt 7
Norwalk, CT 06856

Re: Application of Revenue Recognition Standards to Franchisors

Dear Chairman Golden,

We appreciate FASB’s decision on Wednesday, April 8, 2020, to delay the effective date of ASC Topic 606 for private franchise brands and to add a research project to the technical agenda that will review the recognition of income derived from the collection
of initial franchise fees from franchisees. 

We are not writing you to ask you to change your principles. Rather, we write to urge you to adopt a simplified version of the methodology for implementing such principles (at least for non-public franchisors) and commend you for taking steps towards that
end.

When a franchisor begins to sell franchises, franchise fee revenue dominates royalty revenue, which takes time as franchise units are established. A small, and perhaps new, franchisor is not well positioned to spend what has proven to be upwards of twenty-five
to fifty thousand dollars on accounting fees in order to implement ASC 606.

The question is how much revenue should be recognized by the franchisor when it completes providing the advice and services necessary for the franchisee to begin operations. Your principles basically provide that, at that time, the franchisor recognize as
revenue the cost it is incurred in providing non brand-specific services necessary for the franchisee to open business to open for business.

The International Franchise Association has reviewed this matter and determined that across the industry, emerging brands with less than 100 units, which consists of more than 1500 brands, spend on average 73 percent of the franchise fees providing such
non-brand specific services.[1]

Accordingly, we would urge you to adopt an expedient that allows private franchisors to immediately recognize a portion of the maximum initial franchise fee allowable, without additional analysis required.

In at least four instances, the Private Company Council and the Financial Accounting Standards Board have provided similar accounting alternatives private companies. In at least one instance, this alternative was provided on the basis that it would ‘reduce
the cost and complexity’ of applying the standard.[2]

The undersigned speak with some experience with regards to the need for practical rules to allow for the application of accounting principles by small businesses.

Very truly yours,

 

BRAD SHERMAN
Chairman
Subcommittee on Investor Protection,
Entrepreneurship and Capital Markets
Co-Chair
Congressional Caucus on CPAs
and Accountants

 


[1] “Franchisor’s Business Costs Related to the Initial Franchise Fee,” Anya Nowakowski, FRANdata, April 27, 2020.
www.frandata.com/franchise-business-costs_and_iff/

[2] “Business Combinations (Topic 805),” FASB Accounting Standards Update, No. 2014-18 (December 2014): pg. 1,

https://www.fasb.org/jsp/FASB/Document_C/DocumentPage?cid=1176164674146&acceptedDisclaimer=true

Related Legislative Issues

Selected legislative information:Economy, Finance, Small Business

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