From Fair Value To Carryover: ASU 2021-08 For Restaurants

April 16, 2025

Breaking Down How Restaurants and Franchisors Must Handle Deferred Revenue In Acquisitions

In October 2021, FASB issued ASU 2021-08, “Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities Associated with Revenue Contracts.” This update is effective for all private companies with fiscal years beginning after Dec. 15, 2023, and changes how businesses account for deferred revenue and other revenue-related items acquired in a business combination.

Under this guidance, when acquiring a business, you must apply ASC 606 (Revenue from Contracts with Customers) to contract assets and liabilities. Meaning you must carry over the acquiree’s existing balances as if you had initially entered into the revenue contracts yourself. Previously, under ASC 805, Business Combinations, all assets and liabilities were required to be recorded at their fair value.

Why This Matters For Restaurants & Franchisors

When financial records are maintained in accordance with GAAP, restaurants and franchisors regularly have deferred revenue related to some, or all, of the following: franchise fees, area development agreements, gift cards, loyalty programs, or party and catering deposits. ASU 2021-08 changes how these are treated in acquisitions, which could have a material impact on post-close financial statements.

1. Franchise Revenue Recognition

Franchisors often collect upfront fees for new franchise agreements or area development deals. Under ASU 2021-08, deferred revenues must continue to be recognized over a period of time after an acquisition based on the original contract terms and performance obligations (versus fair value). This aligns post-acquisition revenue recognition with the original agreement. Ultimately, this practice ensures consistency and compliance with ASC 606. This practice also applies to any related deferred expenses (i.e. deferred commission expenses).

2. Gift Cards & Loyalty Programs

When acquiring companies or brands with customer programs like gift cards or points-based loyalty, the associated deferred revenue must also follow the original revenue recognition pattern. This can impact how quickly revenue is recognized after the transaction. It also affects forecasts and integration planning, and, depending on escheatment laws, could impact cash flows.

3. Impact on EBITDA and Metrics

The timing of revenue recognition under ASU 2021-08 may reduce immediate post-acquisition revenue and impact EBITDA, margin analysis, and other key performance indicators, though it wouldn’t necessarily impact future cash flows. Understanding these timing differences is important for deal teams for accurate modeling and internal reporting.

Improved Transparency Is The Goal

ASU 2021-08 aims to increase transparency and consistency in revenue recognition in acquisitions. For restaurants and franchisors, this means more closely tracking deferred revenue obligations and ensuring post-close financials accurately reflect the underlying economics of the original customer contracts.

In cases where the deferred revenue acquired was not previously in accordance with GAAP or there is an error in the GAAP reporting, the acquirer should adjust the balances at the acquisition date. This will help ensure proper compliance with ASC 606. This means the acquirer must evaluate the underlying customer contracts and determine the appropriateness of the recorded contract liability or asset using the accounting principles of ASC 606 as if it had originated the contracts themselves.

An acquirer must ensure that balances carried forward are correct and in accordance with ASC 606 to state revenue recognition and financial reporting accurately. If the acquirer utilizes practical expedients in their application of ASC 606, they must apply the same guidance to the acquired deferred revenue to ensure it aligns with their policies. This may result in adjustments to those balances in order to get them in line with the acquirer’s accounting policies.

GBQ can guide you through the business combination and deferred revenue assessment processes. Our team can help ensure your acquired balances are correctly stated. Whether you have a question about GAAP guidance for our assurance team or a question about valuation, we have a team of experts to help you. Contact GBQ today for assistance.

By Kari Maue, CPA, director, assurance & business advisory services