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1110534006 YURI ANNISA
Brief Description of the Case and Related Problems:
JML is a company that wants to expand its business in Mainland China. During the
year ending December, 2005, JML made franchise agreements with some PRC franchisees.
These agreements were entered into by a wholly subsidiary of JML (China). JML (China)
will not keep any inventories, any goods ordered by franchisees will be shipped directly from
JMLs workshops.
According to the franchise agreements, JML (China) will initially provide services to
assists the franchisees to set up their operation in China, including: outlet locations, image
design, staff training, information system sourcing and testing. Initial service is completed
when the franchisees start retailing JMLs product in the outlets.
The franchisees should pay initial fees of $1.8 million. The initial fee is refundable,
after deduction of the cost incurred by JML (China), when substantial performance has been
completed. After that, JML (China) will start to charge the franchisees an annual fee to cover
the cost of continuing services, such as staff training and information consultancies, with a
reasonable profit. JML (China) has the following franchise agreements with PRC franchisees
Shanghai franchisee Provision of initial services was completed during the year and all the
initial fees has been received. Total cost incurred amount to $1 million. The annual franchise
service fee of $500,000. Shanghai shall purchase from JMLs China holding company, or
JML subsidiaries. Shanghai franchisee should buy goods at least $50 million per annum and a
total $400 million for 5 years. Total invoice price for the latest date is $40 million only. And
the rest will be delivered in early 2006
Beijing franchisee

Provision of initial service started recently. Beijing franchisee already

paid the initial fee for $600,000. JML (China) has assisted Beijing franchisee to locate the
outlet location but no agreement between Beijing franchisee and landlord. JML (China)
already provided some training to Beijing franchisee. Recruitment of sales team has not
started yet. The cost incurred to JML (China) for initial service is $150,000 and the total cost
is expected to be $1 million.

Guangzhou franchisee

Provision of initial service is partly completed and all initial

fees already completed. Guangzhou franchisee will open its first outlet in March, 2006. The
cost incurred to JML (China) to Guangzhou franchisee is $700,000 and total cost expected to
be $1 million. The Guangzhou franchisee has already placed orders for its 2006 sales and the
goods will be delivered in early 2006.
Arguments (based on the related Standards):
Based on the brief explanation above, the general principles that should be applied in the
recognition is according to IFRS 15. Because, IFRS 15 is that an entity recognize revenue to
depict the transfer of promised goods or services to customers in an amount that reflects the
consideration to which the entity expects to be entitled in exchange for those goods or
services. That including several steps.
Step 1 : JML should identified the contracts with PRC franchisees.
Step 2 : JML should identified the performance obligation in the contract.
Step 3 : JML should determine the transaction price
Step 4 : JML should allocate the transaction price
Step 5 : JML should recognize revenue when a performance obligation is satisfied
IFRS 15 also includes requirements for accounting for some costs that are related to a
contract with a customer. JML (China) would recognize an asset for the incremental costs of
obtaining a contract if those costs are expected to be recovered. For costs to fulfill a contract
that are not within the scope of other Standards, a company would recognize an asset for
those costs if the following criteria are met:
the costs relate directly to a contract (or a specific anticipated contract);
the costs generate or enhance resources of the company that will be used in
satisfying performance obligations in the future; and
the costs are expected to be recovered.
According to IAS 18 about Revenue outlines the accounting requirements for when to
recognise revenue from the sale of goods, rendering of services, and for interest, royalties and
dividends. Revenue is measured at the fair value of the consideration received or receivable
and recognised when prescribed conditions are met, which depend on the nature of the
revenue. Revenue: the gross inflow of economic benefits (cash, receivables, other assets)
arising from the ordinary operating activities of an entity (such as sales of goods, sales of
services, interest, royalties, and dividends).

Recognition, as defined in the IASB Framework, means incorporating an item that meets the
definition of revenue (above) in the income statement when it meets the following criteria:

it is probable that any future economic benefit associated with the item of revenue
will flow to the entity, and

the amount of revenue can be measured with reliability

Between IAS 18 and PSAK 23 is consistenly similiar, PSAK 23 Based on the purpose, the
entity that established by the owners of capital can be categorized into two parts:

Profit oriented : entities that have the primary purpose of improving the company's

growth by producing optimum results.

Non-profit oriented : entities that have the primary purpose is not looking for
optimum profit, but rather to provide service to the community through the products
and services provided.

for each of franchisees, the amount of revenue and profit that should be reported for the year
ending for 31 December 2005 are
a. Shanghai Franchisee
Because of provision of initial services and initial fee already complete, JMLs can
recognized the initial fee as revenue. Based on the agreement, initial fee is refundable
after deduct by cost incurred by JML as the amount $800,000. So, revenue that can be
recognized as much $1 million ($1,800,000-$800,000)
Initial Services


Recognized as JMLs revenue from franchise

Annual francise fees


Recognized as JMLs revenue from annual

Selling Goods
Total Revenue


franchise service
Recognized as JMLs goods sales

b. Beijing Franchisee
Beijing franchisee only paid 1/3 of initial fee, so $600,000 is not recognized as
revenue because the total of initial fee is not fulfill yet. The revenue of JMLs from
Beijing franchisee only from initial service fee as much $150,000

Initial services


Total revenue


Recognized as JMLs revenue from

franchise agreement

c. Guangzhou Franchisee
Initial fee is complete. But the service is not complete yet. The cost incurred from
initial service is $700,000 so it will recognized as JMLs revenue.
Initial services


Total revenue


Recognized as JMLs revenue from

franchise agreement