---
title: "Check Item 21 financial statements in the franchise disclosure document"
url: "https://ailawframework.com/practice/franchising-and-distribution/check-the-solvency-statement-and-financial-reports-before-the-disclosure/united-states"
type: "task_jurisdiction_version"
site: "AI Law Framework"
id: "A34-OB20261022-2-US"
practice_area: "Franchising & Distribution"
tier: "yellow"
lawyer_review: "required"
jurisdictions: ["US"]
last_reviewed: "2026-10-22"
---

# Check Item 21 financial statements in the franchise disclosure document

> Extract the financial statements attached to the disclosure document, the periods they cover, whether the file describes them as audited, and any phase-in or affiliate-guarantee wording.…

Canonical page: https://ailawframework.com/practice/franchising-and-distribution/check-the-solvency-statement-and-financial-reports-before-the-disclosure/united-states  
Last reviewed: 2026-10-22

Site index for agents: https://ailawframework.com/llms.txt

## Key facts

| Fact | Value |
| --- | --- |
| Practice area | [Franchising & Distribution](https://ailawframework.com/practice/franchising-and-distribution.md) |
| Human involvement | Yellow: Lawyer and AI draft together |
| How AI is used | Extract the financial statements attached to the disclosure document, the periods they cover, whether the file describes them as audited, and any phase-in or affiliate-guarantee wording. Do not prepare financial statements or an audit opinion. |
| What the lawyer must review | 16 CFR 436.5(u) requires financial statements prepared according to United States generally accepted accounting principles, as revised by any future United States government mandated principles, or as permitted by the Securities and Exchange Commission. Except for the start-up phase-in in paragraph (u)(2), they must be audited by an independent certified public accountant using generally accepted United States auditing standards, in a table comparing at least two fiscal years: the balance sheet for the previous two fiscal year-ends, and statements of operations, stockholders' equity, and cash flows for the previous three fiscal years. An affiliate's statements may be used only if they meet paragraphs (u)(1)(i) and (ii) and the affiliate absolutely and unconditionally guarantees the franchisor's duties to the franchisee. The guarantee need not extend to third parties, and a copy must be attached. Separate statements are required for the franchisor and any subfranchisor, and for a parent that commits to perform post-sale obligations or guarantees the franchisor's obligations. A start-up may phase in audited statements on the schedule in paragraph (u)(2), which the lawyer applies. ABA Model Rules 1.1 and 5.3 and Formal Opinion 512 leave that review with the lawyer. |
| Written for | United States |
| Applies to | [Check the solvency statement and financial reports before the disclosure document is given](https://ailawframework.com/practice/franchising-and-distribution/check-the-solvency-statement-and-financial-reports-before-the-disclosure.md) |

## Checking plan

- What the AI does: Extract the financial statements attached to the disclosure document, the periods they cover, whether the file describes them as audited, and any phase-in or affiliate-guarantee wording. Do not prepare financial statements or an audit opinion.
- Basis: Checked against the linked sources on 22 October 2026. Confirm the current instrument before reliance.

## Notes

- The eCFR page says it is not an official legal edition of the CFR. The May 2008 guide says its advice is not binding on the Commission, and its dollar figures are not the current thresholds.
- The phase-in in 16 CFR 436.5(u)(2) is a year-by-year schedule. The lawyer applies that paragraph rather than a single audit rule for every start-up.
- A parent or affiliate guarantee of the franchisor's performance is not a guarantee given by the franchisee.

## Sources

- [eCFR, 16 CFR Part 436, Disclosure Requirements and Prohibitions Concerning Franchising](https://www.ecfr.gov/current/title-16/chapter-I/subchapter-D/part-436) (checked 2026-10-22)
- [FTC Franchise Rule Compliance Guide (May 2008)](https://www.ftc.gov/system/files/documents/plain-language/bus70-franchise-rule-compliance-guide.pdf) (checked 2026-10-22)

*Practice guidance for planning and review. Confirm current primary sources and the requirements of the actual matter. This is general information, not legal advice.*