Franchisors and franchisees cannot ignore FIN 46R. The relief granted by FASB when compared to the original interpretation is helpful and, for the most part, means that most franchise relationships fall into the business scope exclusion or do not trip all of the hurdles leading to consolidation. However, because many franchisors have related party franchisees, make loans to franchisees, provide debt or lease guarantees to franchisees, or sublease to franchisees, franchisors have no choice but to be alert to the decision points that could lead to consolidation considerations.

If consolidations are to occur, it would behoove the franchisor to plan in advance and in its franchise agreements. For example, a franchisor would be well advised – and may have little choice other than – to require that its franchisees provide audited financial statements prepared by an auditor acceptable to the franchisor (in some cases, this may end up being the same audit firm that the franchisor uses), abide by GAAP, and adopt internal controls over financial reporting records.

In short, franchisors are far better off with FIN 46R than with the original version of the standard. But the new standard compels franchisors and franchisees to pay attention to the financial statement implications arising from the structure of their relationships.