Franchise Accounting - Notes

FRANCHISE ACCOUNTING FRANCHISES – are rights granted to franchise (agent), to sell a specific brand or product or services in a certain geographic area. FRANCHISES FEE a) Initial Franchise Fee 

Represents initial payment for establishing the franchise agreement and for providing certain initial services associated with the agreement



Maybe payable immediately in cash or for an extended period of time



Initial services rendered by the franchisor prior to the opening of the franchisee's operation are the following: a. b. c. d. e. f. g.

b)

Assistance in the site Supervision of the construction activity Assistance in the acquisition of signs fixtures and equipment Provision of bookkeeping & advisory services Provision of employee & mgt. training Provision of quality control Provision of advertising and promotion

For providing specific future services, such as advertising and for the continued use of intangible rights by the franchise.

REVENUE RECOGNITION – INITIAL FRANCHISE FEE –

Revenue is recognized when there is substantial performance by the franchisor. o o o

–

Franchisor is not obliged in any way to refund cash already received of forgive unpaid debt, Initial services by franchisor have been substantially performed No other material conditions or obligations exist.

Direct franchise cost of initial services rendered by the franchisor shall be deferred until related revenue is recognized. Indirect costs are expensed.

2 METHODS OF RECOGNIZING REVENUE FROM INITIAL FRANCHISE FEE 1) Accrual basis – initial franchise fee is collectible over an extended period of time and the collectibility of the unpaid portion of the franchise fee is reasonable assured.

2) Installment method or cost recovery method – initial franchise fee is collectible over an extended period and the collectibilty of the unpaid portion of the initial franchise fee is uncertain. REVENUE RECOGNITION – CONTINUING FRANCHISE FEE –

Collected from the franchise at the end of each month case on a certain percentage of their monthly sales.

–

Recognized as revenue when actually earned and received from the franchisee.

REVENUE RECOGNITION – AREA FRANCHISE FEE –

Same as that for individual franchise fee but substantial performance of services rendered by the franchisor is difficult to determine.

–

Percentage of completion method is usually used –

Cost of servicing each individual franchise within the area and dividing this by total cost of all franchises that are expected to be opened in the area.

CONTINUING SALE OF SUPPLIES o

Franchisor usually sells supplies to the franchisee as part of the continuing services provided in the franchise contract.

TANGIBLE ASSETS INCLUDED IN THE FRANCHISE FEE –

Initial franchise fee may include the sale of specific tangible property

–

A portion of the initial franchise fee must be allocated to such tangible property at its fair market value

–

Fair value is recognized as revenue when title to such property passes to the franchisee even if substantial performance has not occurred.

OPTION TO PURCHASE o

Franchisor has an option to purchase franchise business

o

If option is granted at the time franchise agreement is signed, initial franchise fee is to be deferred.

o

Option is exercised and franchisor acquires business, deferred revenue is treated as a reduction from franchisor's investment.