The decision points described above quite significantly narrow the number of franchisee relationships that could constitute VIEs that are consolidated with the franchisor. But what about existing relationships? What about changes in relationships after a franchise relationship has already been established?

For the most part, making a FIN 46R evaluation is a prospective endeavor; that is, the analysis is performed at the time the franchisee begins operations. Franchisee relationships created and that begin operations before December 31, 2003 must be evaluated, but if the franchisor, after making an exhaustive effort, cannot obtain the information necessary (e.g., the franchisee’s financial statements) to determine whether the franchisee is a VIE, or whether the franchisor is a primary beneficiary, or to perform the accounting required to consolidate, then the franchisee will be excluded from being a consolidation candidate. However, fairly extensive financial statement footnote disclosure of the franchisor’s interests in franchisees is required, and continuous efforts to obtain the necessary information must be made.

Once a FIN 46R evaluation is made, the franchisor need not revisit its decision if, for example, the franchisee suffers actual losses that exceed its expectations. Revisiting the decision not to consolidate is only required if the franchisee’s governing documents or contractual arrangements with the franchisor change the character or adequacy of the equity investment at risk, or if there is a return of investment to the equity investors so that other pecuniary interests become exposed to losses. If the franchisee undertakes additional activities or acquires additional assets beyond those anticipated at the inception, reconsideration is required only if the additions increase the franchisee’s expected losses. Finally, a revisit may also be called for if the franchisee takes in additional equity investments or curtails its activities in a way that decreases its expected losses. However, troubled debt restructurings are not intended to warrant a revisit to the FIN 46R evaluation.