ASB 606 is the Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers, which provides guidelines on how to recognize revenue in financial statements. This accounting standard has an impact on franchisors, as franchisors typically collect initial fees, royalties, and other payments from franchisees.
Therefore, when conducting a franchise audit under ASB 606, franchisors need to follow specific guidelines to ensure compliance with the accounting standards.
Here are some steps to consider when conducting a franchise audit under ASB 606:
1. Identify Performance Obligations
Under ASB 606, franchisors need to identify performance obligations, which are the promises made to franchisees. Franchisors need to identify all the promises made to franchisees and determine whether they are distinct or need to be combined into one performance obligation. This is an essential step as it will determine how revenue is recognized.
2. Determine Transaction Price
Once the performance obligations are identified, franchisors need to determine the transaction price. This is the amount the franchisor expects to receive from the franchisee for fulfilling the performance obligations. Transaction prices may include upfront fees, royalties, advertising fees, and other payments.
3. Allocate Transaction Price
Franchisors need to allocate the transaction price to the performance obligations identified in Step 1. This step requires judgment and may involve estimating the stand-alone selling price of each performance obligation.
4. Recognize Revenue
Once the transaction price is allocated to the performance obligations, franchisors can recognize revenue. Revenue should be recognized when control over the promised goods or services is transferred to the franchisee. This may occur over time or at a point in time, depending on the nature of the performance obligations.
5. Disclose Information
Franchisors need to disclose information about the revenue recognized under ASB 606. This includes information about the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with franchisees.
In addition to these steps, franchisors need to ensure that their accounting policies and internal controls are in compliance with ASB 606. This may involve implementing new accounting policies and controls to ensure compliance with the standard.
Overall, conducting a franchise audit under ASB 606 requires a comprehensive understanding of the accounting standard and the ability to apply it to the franchise business model. Franchisors should seek the assistance of accounting professionals with expertise in the franchising industry to ensure compliance with ASB 606 and accurate financial reporting.
For more information on Franchise Audits and ASB 606, contact us.
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