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Start with the company and accounting basis
Item 21 specifies financial statements, audit standards and treatment of relevant affiliates, parents and subfranchisors. The rule addresses U.S. generally accepted accounting principles, or treatment permitted by the Securities and Exchange Commission, with the applicable audit requirements.
A balance sheet shows financial position at a date; an income statement covers performance over a period; a cash-flow statement explains cash movements. Check the named entity, dates, accountant’s report and notes before comparing figures.
Know which periods the ordinary rule covers
A fiscal year is the business’s accounting year, not necessarily the calendar year.
| Statements under the ordinary requirements | Period |
|---|---|
| Balance sheets | Previous two fiscal year-ends |
| Operations, stockholders’ equity and cash flows | Previous three fiscal years |
An affiliate alternative needs the actual guarantee
The affiliate alternative requires compliant statements and an absolute, unconditional guarantee of all the franchisor’s obligations to the franchisee under the franchise agreement. The guarantee need not cover third parties, and a copy is attached to the disclosure.
Group ownership or a limited support letter is not that guarantee. Separate parent or subfranchisor statement requirements can also apply.
The start-up phase-in is conditional
A start-up franchise system without audited statements may use the limited phase-in. A newly formed U.S. seller does not qualify merely because it is new. Audited statements must be prepared as soon as practicable; the unaudited format must conform as closely as possible, with the required history or conspicuous shorter-history explanation.
| Selling stage described in the rule | Minimum at that stage |
|---|---|
| First partial or full fiscal year selling franchises | Unaudited opening balance sheet |
| Second fiscal year selling franchises | Audited balance-sheet opinion for the end of the first partial or full selling year |
| Third and later fiscal years selling franchises | Required statements for the previous fiscal year plus previously disclosed audited statements still required by the ordinary periods |
Accounts and the support budget answer different questions
Past financial statements do not guarantee future support resources. Check the actual company commitments and cash available for training, systems, travel and field support. Do not treat every parent asset as cash available to its subsidiary.
Scope
- This explains the stated Item 21 periods and conditional alternatives. It does not decide current SEC acceptance of a particular foreign accounting treatment or establish that a start-up or guarantee route applies.
Next step
Establish the required reporting entities, periods, accounting basis and audit requirements with the responsible accountant before assembling the financial exhibits.
Sources & review notes
Federal Franchise Rule
FTC overview · Compliance Guide · Guide PDF · Current regulation
Federal Trade Commission
Passage, dates and research notes
primary · Item 21: Financial statements; targeted follow-up: Complete436.5(u)
these financial statements must be audited by an independent certified public accountant using generally accepted United States auditing standards.
Prior AI-assisted review scope (2026-11-12): Current substantive item read in full from current eCFR. This guide explains selected management implications; it is not a substitute for all prescribed disclosure text. Targeted follow-up at 2026-11-14T00:50:01.831769+00:00: Re-read complete Item21 current text; preparation basis separate from audit, statement entities/periods and conditional phase-in remain. Follow-up read scope: Complete436.5(u). This follow-up does not assert a fresh complete review beyond that scope. The earlier reviewed range is preserved, with current form/CISA/docket limits unchanged unless expressly resolved above.
Federal Trade Commission
Passage, dates and research notes
primary · section-436.6
Respond fully to each disclosure Item.
Current eCFR displayed through 2026-11-09; eCFR is authoritative but not the official legal edition.
Detailed rule records (1)
Item 21 specifies financial statements, audit standards and treatment of relevant affiliates, parents and subfranchisors. The financial condition of a large parent should not be assumed to back a thin selling subsidiary without examining the disclosed commitments and guarantees.
16 CFR §436.5(u): FDD Item 21Keep this reading in your learning library.
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