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Reporting
An MBE must, on its statement of financial position, distinguish between mortgage loans and
mortgage-backed securities that are held for sale and those that are held for long-term investment.
The notes to the financial statements are to disclose whether the MBE used the aggregate method
or the individual-loan method to determine the lower of cost or market.
ASC 942, Financial Services—Depository and Lending, contains specific capital disclosure
requirements including, at a minimum:
1. A description of the minimum net worth requirements related to:
a. Secondary market investors, and
b. State-imposed regulatory mandates.
2. The actual or possible material effects of noncompliance with those requirements.
3. Whether the entity is in compliance with the regulatory capital requirements including, as
of the date of each statement of financial position presented, the following measures:
a. The amount of the entity’s required and actual net worth
b. Factors that may significantly affect adequacy of net worth such as potentially volatile
components of capital, qualitative factors, or regulatory mandates.
4. If the entity is not in compliance with capital adequacy requirements as of the date of the
most recent statement of financial position, the possible material effects of that condition
on amounts and disclosures in the financial statements.
5. Loan servicers with net worth requirements imposed by more than one source are to
disclose the new worth requirements of:
a. Significant servicing covenants with secondary market investors with commonly
defined servicing requirements,
b. Any other secondary market investor where violation of the net worth requirement
would have an adverse effect on the business, and
c. The most restrictive third-party agreement if not already included in the above
disclosures.
The standard points out that noncompliance with minimum net worth requirements may
trigger substantial doubt about the entity’s ability to continue as a going concern.

FINANCIAL SERVICES—TITLE PLANT (ASC 950)

PERSPECTIVE AND ISSUES

ASC 950-350, Financial Services—Title Plant, presents accounting and reporting standards
for costs relating to the construction and operation of title plants. A title plant comprises a record of
all transactions or conditions that affect titles to land located in a specified area. The length of time
spanned by a title plant depends upon regulatory requirements and the time frame required to
gather sufficient information to efficiently issue title insurance. Updating occurs frequently as
documentation of the current status of a title is added to the title plant.
This pronouncement applies to entities such as title insurance companies, title abstract
companies, and title agents that use a title plant in their operations. (ASC 950-350-15-1)
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The standard provides that costs directly incurred to construct a title plant are to be capitalized
when the entity can use the title plant to do title searches and that such capitalized costs are not
normally depreciated. The statement also requires that the costs of maintaining a title plant and of
doing title searches be expensed as incurred. (ASC 950-350-25-1 and 25-2)

DEFINITIONS OF TERMS

Source: ASC 950, Glossary. See Appendix A for additional terms relevant to this topic: Contract,
Customers, and Revenue.
Backplant. A title plant that antedates the period covered by its existing title plant.
Title Plant. A historical record of all matters affecting title to parcels of land in a particular
geographic area. The number of years covered by a title plant varies, depending on regulatory
requirements and the minimum information period considered necessary to issue title insurance
policies efficiently.

CONCEPTS, RULES, AND EXAMPLES

Acquisition Costs
The cost of constructing a title plant includes the cost of obtaining, organizing, and
summarizing historical information pertaining to a particular tract of land. Costs incurred to
assemble a title plant are to be capitalized until the record is usable for conducting title searches.
Costs incurred to construct a backplant (a title plant that predates the time span of an existing title
plant) must also be capitalized. However, an entity may capitalize only those costs that are directly
related to and traceable to the activities performed in constructing the title plant or backplant.
(ASC 950-350-30-1)
The purchase of a title plant or backplant, or an undivided interest therein (the right to its joint
use) is recorded at cost as of the date acquired. If the title plant is acquired separately, it is recorded
at the fair value of consideration given. (ASC 950-350-30-2)
Capitalized title plant costs are not amortized or depreciated unless an impairment in the
carrying amount of the title plant occurs. The following events or changes in circumstances can
indicate that the carrying amount may not be recoverable. An impairment may be indicated by the
following circumstances (not intended to be an exhaustive list):
1. Changing legal or statutory requirements
2. Economic factors, such as changing demand
3. Loss of competitive advantage
4. Failure to maintain an up-to-date title plant
5. Circumstances that indicate obsolescence, such as abandonment of title plant.
(ASC 950-350-35-1 through 35-3)
The provisions of ASC 360 apply to any such impairment. See chapter on ASC 360 for a
complete discussion of this topic.
Operating Costs
Costs of title plant maintenance and of conducting title searches are required to be expensed
currently. A title plant is maintained through frequent, often daily, updating which involves
adding reports on the current status of specific real estate titles and documentation of security or
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other ownership interests in such land. A title search entails a search for all information or
documentation pertaining to a particular parcel of land. This information is found in the most
recently issued title report.
Once a title plant is operational, costs may be incurred to convert the record from one storage
and retrieval system to another or to modify the current storage and retrieval system. These costs
may not be capitalized as title plant. However, they may be separately capitalized and amortized
using a systematic and rational method.
Reporting Title Plant Sales20
The sale of a title plant is to be reported separately. The amount to be reported is determined
by the circumstances surrounding the sale as follows:
Terms of sale Amount reported
a. Sale of title plant and waiver of all rights to Amount received less adjusted cost of title plant
future use
b. Sale of undivided ownership interest (rights Amount received less pro rata portion of adjusted
to future joint use) cost of title plant
c. Sales of copies of title plant or the right to If a contract with a customer, in accordance with
use it ASC 606.
Otherwise, in accordance with ASC 610-20

Note that in the last instance the amount reported is simply the amount received. In this case,
no cost is allocated to the item sold unless the title plant’s value drops below its adjusted cost as a
result of the sale. (ASC 950-350-40-1)

FRANCHISORS (ASC 952)21

PERSPECTIVE AND ISSUES

Technical Alert
Maintenance Update 2017-09 simplifies the guidance for ASC 952 and consolidates all of it
into ASC 952-10.
Overview
Franchising has become a popular growth industry with many businesses seeking to sell
franchises as their primary income source and individuals seeking to buy franchises and become
entrepreneurs. How to recognize revenue on the individual sale of franchise territories and on the
transactions that arise in connection with the continuing relationship between the franchisor and
franchisee are prime accounting issues.
ASC 952, Franchisors, offers incremental guidance for franchisors. (ASC 952-10-05-1)

20 Upon implementation of ASU 2014-09, Revenue from Contracts with Customers, guidance for revenue, deferred
revenue, and costs associated with “a” and “b” can be found in ASC 606 and ASC 610.
21 Upon implementation of ASU 2014-09, guidance for revenue from franchise sales can be found in ASC 606.
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DEFINITIONS OF TERMS

Source: ASC 952, Glossary. See Appendix A for additional terms relevant to this topic: Contract,
Customer.
Area Franchise. An agreement that transfers franchise rights within a geographical area
permitting the opening of a number of franchised outlets. Under those circumstances, decisions
regarding the number of outlets, their location, and so forth are more likely made unilaterally by
the franchisee than in collaboration with the franchisor. A franchisor may sell an area franchise to a
franchisee who operates the franchised outlets or the franchisor may sell an area franchise to an
intermediary franchisee who then sells individual franchises to other franchisees who operate the
outlets.
Continuing Franchise Fee. Consideration for the continuing rights granted by the franchise
agreement and for general or specific services during its term.
Franchise Agreement. A written business agreement that meets the following principal
criteria:
1. The relation between the franchisor and franchisee is contractual, and an agreement
confirming the rights and responsibilities of each party is in force for a specified period.
2. The continuing relation has as its purpose the distribution of a product or service, or an
entire business concept, within a particular market area.
3. Both the franchisor and the franchisee contribute resources for establishing and main­
taining the franchise. The franchisor’s contribution may be a trademark, a company
reputation, products, procedures, labor, equipment, or a process. The franchisee usually
contributes operating capital as well as the managerial and operational resources required
for opening and continuing the franchised outlet.
4. The franchise agreement outlines and describes the specific marketing practices to be
followed, specifies the contribution of each party to the operation of the business, and sets
forth certain operating procedures with which both parties agree to comply.
5. The establishment of the franchised outlet creates a business entity that will, in most cases,
require and support the full-time business activity of the franchisee.
6. Both the franchisee and the franchisor have a common public identity. This identity is
achieved most often through the use of common trade names or trademarks and is
frequently reinforced through advertising programs designed to promote the recognition
and acceptance of the common identity within the franchisee’s market area.
The payment of an initial franchise fee or a continuing royalty fee is not a necessary criterion
for an agreement to be considered a franchise agreement.
Franchisee. The party who has been granted business rights (the franchise) to operate the
franchised business.
Franchisor. The party who grants business rights (the franchise) to the party (the franchisee)
who will operate the franchised business.

CONCEPTS AND RULES

Franchise Sales
Franchise operations are generally subject to the same accounting principles as other
commercial entities. Special issues arise out of franchise agreements, however, which require
the application of special accounting rules.