October 22, 2020

Hillary H. Salo
Technical Director
Financial Accounting Standards Board
401 Merritt 7
PO Box 5116
Norwalk, CT 06856-5116

Dear Ms. Salo:

PricewaterhouseCoopers LLP appreciates the opportunity to respond to the FASB’s Proposed Accounting Standards Update, Franchisors—Revenue from Contracts with Customers (Subtopic 952-606). We support the FASB’s ongoing efforts to monitor the implementation of new standards, including Topic 606, and assess whether additional guidance is warranted, particularly for private companies.

Recognizing that one of Topic 606’s stated objectives was to improve comparability across industries, we generally do not support introducing industry-specific revenue guidance. However, if the FASB concludes an exception is warranted for the transactions discussed in the proposed Update, we support limiting the scope in this case to franchisors that are not public business entities. This approach would minimize disruption in other industries where similar upfront activities may exist and limit the number of situations when applying the proposed guidance results in a different financial reporting outcome as compared to applying the general model in Topic 606.

The Appendix contains our detailed responses to the Questions for Respondents and other comments on the proposed Update.

If you have any questions regarding our comments, please contact Heather Horn at (310) 874-5449, Pat Durbin at (848) 228-0340, or Angela Fergason at (408) 679-1672.

Sincerely,

PricewaterhouseCoopers LLP

We agree with the Alternative Views provided in BC43 of the proposed Update that the proposed amendments provide an exception to Topic 606 rather than a practical expedient. Generally, we do not support introducing industry-specific exceptions to the revenue guidance as it is inconsistent with the stated objectives of Topic 606. We recommend the FASB limit such exceptions to situations when it is clear the application of the model has produced undue complexity or produces outcomes that are inconsistent with the economics of specific types of arrangements. In our judgment, based on the experience in our practice, it is not clear that this threshold has been met.

We are concerned that the FASB’s conclusions in the proposed Update are based on an assumption that applying the practical expedient will provide “financial reporting results that are more consistent with the intent of Topic 606,” as stated in BC10 and elsewhere in the proposed Update. The proposed guidance allows for upfront recognition of revenue without assessing whether certain pre-opening services transfer a distinct service to the customer, which would otherwise be a required assessment under Topic 606. Whether pre-opening services transfer a distinct service to the customer depends on a contract’s specific facts and circumstances. We do not believe Topic 606 reflects an intent or bias that pre-opening services would be distinct. We are aware of multiple franchisors that have adopted Topic 606 and concluded that some or all of the pre-opening services are not distinct from the franchise rights granted to a customer. As a result, we expect applying the proposed guidance could result in a different financial reporting outcome as compared to applying the general model in Topic 606. Thus, if the FASB moves forward with the proposed guidance, we recommend acknowledging that the guidance represents an exception to Topic 606 to avoid confusion, especially for those who have already adopted Topic 606 and concluded pre-opening services are not distinct.

If the FASB concludes an exception is warranted for the transactions discussed in the proposed Update, we believe the scope of the amendments should be limited to franchisors that are not public business entities. As we note in our response to Question 3, we expect private companies that have not yet adopted Topic 606 to benefit the most from the proposed amendments. Limiting the scope of the amendments will minimize disruptions to the application of Topic 606 in other industries where similar upfront activities may exist.

As we note in our response in Question 1, we believe the proposed amendments provide an exception to Topic 606 and therefore, it would not be appropriate for entities in other industries to analogize to these amendments. We agree with including guidance that explicitly prohibits application by analogy. We are concerned, however, that statements within the proposed Update asserting the practical expedient will provide “financial reporting results that are more consistent with the intent of Topic 606,” may be misconstrued by preparers in other industries as a presumption or bias in Topic 606 that upfront activities are distinct in similar fact patterns. Therefore, we recommend removing or clarifying these statements.

We expect the amendments in the proposed Update would reduce cost and complexity of applying Topic 606 for some franchisors, as it would eliminate the need to apply judgment to assess whether certain services are distinct from franchise rights granted to a customer. The complexity of this assessment, and accordingly the amount of cost reduction and benefit from applying the expedient, will vary from entity to entity depending on the terms of an entity’s franchise arrangements and the nature of the pre-opening services.

We observe that the majority of costs related to this issue are likely to be incurred as part of a franchisor’s initial implementation of Topic 606. We believe ongoing costs of applying this aspect of the standard will often not be significant unless the terms of an entity’s franchise arrangements subsequently change. Therefore, we expect private companies that have not yet adopted Topic 606 to benefit the most from the proposed amendments.

We believe the superseded guidance from paragraph 952-605-25-4 is not necessary because Topic 606 provides guidance on the allocation of transaction price that addresses the concerns outlined in BC20. For example, if a contract requires a large initial franchise fee while the continuing franchise fee is small, the allocation guidance in Topic 606 would require allocation of the total transaction price (both the initial fee and continuing fee) to the performance obligations in the contract based on standalone selling price and prevent inappropriate frontloading of revenue. Therefore, we recommend removing paragraph 952-606-25-3.

If the FASB decides to retain paragraph 952-606-25-3, we believe it is generally operable; however, preparers could incur additional costs to comply with the requirement. Additionally, it may be complex to determine the cost of providing a right to access symbolic intellectual property (the franchise license) to a specific franchisee, which is likely the most common “continuing service” in these arrangements. We also anticipate questions could arise regarding the meaning of “continuing services” in the context of Topic 606. If the FASB decides to retain this requirement, we recommend replacing “continuing services” with “unsatisfied performance obligations” to be more consistent with Topic 606 terminology.

Yes. If the FASB concludes an exception is warranted for the transactions discussed in the proposed Update, we believe the scope of the amendments should be limited to pre-opening services.

We do not believe additional guidance is needed for the proposed amendments to be operable. Refer to our response to Question 4 and our Other comments below for recommendations to improve the clarity and operability of the proposed amendments.

Yes. We believe entities should be required to disclose use of the proposed guidance because it could result in a different accounting outcome as compared to applying Topic 606 without the expedient. We defer to financial statement users’ input on the decision-usefulness of the proposed amendments on the financial statements.

Yes. We believe entities that have not yet adopted Topic 606 should be required to apply the transition provisions and effective date in paragraph 606-10-65-1 to the amendments in this proposed Update.

Yes. We believe entities that have already adopted Topic 606 should be required to apply the amendments in this proposed Update on a full retrospective basis for consistency and comparability purposes.

We defer to financial statement preparers’ input on the practicability of the effective date of the amendments in this proposed Update based on the period of time necessary to adopt the proposed amendments.

In addition to our responses on the FASB’s specific questions, we have the following additional comments and recommendations on the proposed Update: