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

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

Option is exercised and franchisor acquires business, deferred revenue is

treated as a reduction from franchisor's investment.