Question

On January 1, 2020, Franchisee Inc. enters into a contract with Italian Fine Dining Inc. for the right (beginning immediately) to operate an Italian Fine Dining restaurant and receive on-going consulting services for a five-year period. The upfront fee of $180,000 also includes specialized equipment for $24,000. The standalone selling price of the franchise services and specialized equipment are $156,000 and $24,000, respectively. The equipment (with a cost of $18,000) was transferred to the franchisee on March 1, 2020. Determine the amount of revenue to recognize for Italian Fine Dining Inc. on January 1, 2020, March 1, 2020, and December 31, 2020

Answer 1

Under current US GAAP, the up-front franchise fee is
recognized as revenue when all material services or conditions
relating to the sale have been substantially performed or
satisfied by the franchisor. This is often when the location
commences operations.
Under the new standard, up-front payments are part of the
consideration received for the contract with the franchisee.
In order to determine the pattern and timing of revenue
recognition, franchisors need to evaluate whether each pre-
opening activity represents a performance obligation (see
Performance obligations) to which some portion of the
transaction price should be allocated. We expect that most
pre-opening activities are either administrative activities or
services highly interrelated with the franchise right. In such
cases, a significant portion or all of the up-front fee will usually
be recognized as revenue on a straight-line basis over the term
of the franchise agreement.

Since the period of contract is 5 year revenue will be recognise over 5 year

Amount of revenue to be recognise on

Jan 2020 - no revenue

Mar 2020- $6000 ($24000-$18000)

Dec 2020- $156000/5 = $31200