Question

Some transactions have complicated revenue recognition. How does the following transaction types relate to the new revenue recognition rules (FASB).

1. Non-refundable up-front fees

2. Franchises

Please provide examples and references.

Answer 1

1. For the non- refundable fees. Entity should recognise revenue when the following conditions are fulfilled :-

a) the entity has no remaining obligations to transfer goods or services to the
customer and all, or substantially all, of the consideration promised by the
customer has been received by the entity and is non-refundable;

OR

b) the contract has been terminated and the consideration received from the customer
is non-refundable.

2. For the franchisee business 5 step revenue recognition model will be used. For example:- UPFRONT FRANCHISEE FEES. A customer’s ability to derive benefit from a license of intellectual property depends on the entity continuing to maintain and support the intellectual property. Within a franchise agreement that includes the right to use the franchisor's intellectual property (i.e., the license), is usually also included other promised goods or services that are highly interdependent on, or highly interrelated to, the license. As a result, the license may need to be combined with other performance obligations that are associated with the up-front or initial franchise fees, and the franchisor would need to determine if the combined performance obligation is satisfied over time or at a point in time.Therefore, applying the new revenue recognition standard may result in a franchisor being required to recognize revenue over longer periods, such as the term of the franchise agreement.

Thanks and Regards