Question

various provisions of IFRS/FASB related to Franchise Accounting

Answer 1

Franchise Accounting :

Under a franchise agreement, the franchisee pays fees to a franchisor in exchange for the right to use his company's name, logos and training materials. The initial franchise fee should be listed as an intangible asset on the franchisee's books and as deferred income on the franchisor's books. The maximum deferral is 40 years or the life of the franchise agreement, whichever is shorter. Portions of the deferred amount are recognized as revenue or expenses as the fee is earned. The earning schedule may be based on the services used by the franchisee, a percent of gross sales for a specified period or a recurring flat fee.

Sales Completion :

The franchisor is entitled to income from the sale of a franchise only after he has completed all material conditions of the sale and performed all services required by the contract with the buyer. This includes all standard services and conditions of the company's sale contract, even if these are not specifically listed in the sale agreement with this particular franchisee. The franchisor may not have any obligation or intent to refund any part of the purchase price. If there is a possible refund in the future, the sales income must be adjusted to account for the refund.

Revenue Recognition :

The new franchise must be open to customers before the franchisor may recognize revenue from franchise fees. Reduce the recognized revenue by the amount of any costs, such as travel costs or repairs made to the franchise location. The franchise fee must be amortized over its life if it is very large compared to the continuing fees. This prevents misstatement of income in the first year that does not represent the true expectation in future years.

Continuing Franchise Fee :

The franchisor can recognize revenue from continuing franchise fees as soon as the payment becomes due from the franchisee. This includes fees that are earmarked to reimburse you for specific out-of-pocket expenses, such as an ad campaign on nationwide television. The franchisor is responsible for paying the expenses and will not recover his costs until it is time for the franchisee's next payment to be due. Any corresponding expenses should also be recorded at the same time the revenue is recognized.

Supplies and Equipment :

If the franchisor provided physical goods such as supplies, kitchen equipment, furniture or signage to assist the franchisee in opening his location, a portion of the franchise fee may be recognized as revenue immediately. Use the fair market value of the goods provided to determine the amount of the journal entry. This provision also applies if the franchisee is entitled to a discount when purchasing supplies or equipment. Recognize franchise fees equal to difference between the franchisee's price and the fair market value of the materials sold.