When should Collins recognize revenue for the initial and continuing franchise fees?

Collins, Inc., entered into a 10-year franchise agreement with an individual. For an initial franchise fee of $40,000, Collins agrees to assist in the design and construction of the franchise location and in all other necessary start-up activities. Also, in exchange for advertising and promotional services, the franchisee agrees to pay continuing franchise fees equal to 5% of revenue generated by the franchise. When should Collins recognize revenue for the initial and continuing franchise fees?

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Expert Solution

Specific conditions for revenue recognition of the initial franchise fee are provided by FASB ASC 952-605-25-1. A key to these conditions is the concept of substantial performance. It requires that substantially all of the initial services of the franchisor required by the franchise agreement be performed before the initial franchise fee can be recognized as revenue. The term “substantial” requires professional judgment on the part of the accountant. Often, substantial performance is considered to have occurred when the franchise opens for business.

Continuing franchise fees are recognized over time as the services are performed.

Substantially all of the initial services of the franchisor required by the franchise agreement be performed before the initial franchise fee can be recognized as revenue.

Continuing franchise fees are recognized over time as the services are performed.

Renze Joy Candido answered 1 year ago

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