The Financial Accounting Standards Board continues to field and answer one-off questions on revenue recognition, most recently finalizing a clarification on collaborative arrangements and answering questions about franchise fees.
The FASB has finalized Accounting Standards Update No. 2018-18 to clarify how to account for certain collaborative arrangements in light of the new revenue recognition rules contained in Accounting Standards Codification Topic 606. The new guidance says certain transactions between parties to collaborative arrangements should be accounted for under ASC 606 when a party to the arrangement is a customer in that context. The new pronouncement also aligns the guidance in ASC 606 with other guidance on collaborative arrangements, sometimes regarded as “virtual” joint ventures, in ASC 808.
A collaborative arrangement under U.S. GAAP is one where two or more parties participate in some kind of joint operating activity with the usual risks and rewards of any business venture, depending on the activity’s commercial success. Such arrangements often do not result in the formation of an independent legal entity, leading to questions and different conclusions about whether transactions should be accounted for under ASC 606 or ASC 808.
FASB says its new guidance will produce more comparability among companies because it sorts out with greater clarity when units of account in collaborative arrangements are subject to guidance in ASC 606 or ASC 808. “The parts of the collaborative arrangement that are not in the scope of the revenue recognition standard should be presented separately from revenue accounted for under the revenue recognition standard,” the FASB says.
Separately, the FASB also issued a staff memo recently to help private companies as they prepare to apply ASC 606 beginning in 2019. The FASB says it has heard questions about how private company franchisors should recognize certain franchise fees under the new standard.
The FASB staff paper provides illustrations meant to help franchise companies understand how the guidance applies to their particular types of transactions. It focuses preparers on how to identify performance obligations under the new rules, which require companies to exercise some judgment.
Calendar year public companies began applying ASC 606 beginning on Jan. 1, 2018, while private companies are preparing for the guidance to take effect a year later on Jan. 1, 2019.