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The provisions of PFRS 15 that directly relate to the accounting for franchises can be found on the “licensing
section” of PFRS 15 (PFRS 15.B52-B63). An entity shall apply the specific principles in this section in conjunction
with the general principles that are applicable to all types of contract with customers.
PFRS 15 defines a license as one that “establishes a customer’s rights to the intellectual property on an entity.”
Examples of licenses of intellectual property:
a. Software and technology
b. Motion pictures, music and other forms of media and entertainment
c. Franchises; and
d. Patents, trademarks and copyrights
A franchise is a contractual arrangement under which the franchisor grants the franchisee the right to sell
certain products or services, to use certain trademarks or trade names or to perform certain functions, usually
within a designated geographical area.
Franchises are of two types:
1. Contractual arrangement between two private entities or individuals
2. Contractual arrangement between a private entity or an individual and the government (frequently
referred to as license or permits)
The entity need not assess the criteria above if they have been met on contract inception unless there is
an indication of a significant change in facts and circumstances, for example, when the customer’s ability
to pay subsequently deteriorates significantly.
General Principles:
Each promise to transfer the following is a performance obligation to be accounted separately:
a. A distinct good or service (or a distinct bundle of goods or services); or
b. A series of distinct goods or services that are substantially the same and have the same pattern of
transfer to the customer
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Customer can benefit
A customer can benefit from a good or service if the good or service could be used, consumed, sold for
an amount that is greater than scrap value or otherwise held in a way that generates economic benefits.
The fact that the entity regularly sells a good or service separately indicates that a customer can benefit
from the good or service on its own or with other readily available resources.
Separately identifiable
A promise to transfer good or service is separately identifiable if the good or services:
a. Is not an output to a combined output by the customer
b. Does not significantly modify other goods or services promised in the contract
c. Is not highly interrelated with other goods or services promised in the contract. For example, the
customer’s decision of not purchasing good or service does not affect the other promised goods or
services in the contract.
Performance obligations include only activities that involves the transfer of a good or service to a
customer. Performance obligations do not include administrative tasks to set up a contract.
A performance obligations is satisfied over time if one of the following criteria is met
a. The customer simultaneously receives and consumes the benefits provided by the entity’s
performance as the entity performs
b. The entity’s performance creates or enhances an asset (e.g. work in progress) that the customer
controls as the asset is created or enhanced.
c. The entity’s performance does not create an asset with an alternative use to the entity and the
entity has an enforceable right to payment for performance completed to date.
If the entity cannot demonstrate that a performance obligation is satisfied over time, it is presumed that
the performance obligation is satisfied at a point in time.
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Intellectual Property (IP) changes Intellectual property (IP) does not change
throughout the license period. throughout the license period.
a. The entity continues to be involved
with the IP; and
b. The entity undertakes activities that
significantly affect the IP.
May be evidenced by a sales-based royalty
agreement between the entity and the
customer
The transaction price is the amount of consideration to which an entity expects to be entitled in
exchange for transferring promised goods and services to a customer, excluding amounts collected on
behalf of third parties (e.g. some sales taxes).
The transaction price is normally the contract price. However, the transaction price may not be equal to
the contract price if the consideration in the contract is affected by any of the following:
a. Variable consideration
b. Constraining estimates of variable consideration
c. The existence of a significant financing component in the contract
d. Non-cash consideration
e. Consideration payable to a customer
Franchise fees refer to payments made by the franchisee to the franchisor in relation to the franchise
right granted by the franchisor. These fees may cover the supply of know-how, initial and subsequent
services, and equipment and other tangible assets.
1. Initial franchise fee – this is the one-off payment made by the franchisee to the franchisor to obtain
the franchise right. It is normally paid at the signing of the franchise agreement and are normally
non-refundable. However, some franchise agreements allow initial franchise fees to be paid over an
extended period of time and provide for the right of refund up to a certain amount.
Initial franchise fees do not normally include cost of initial inventory or furniture and fixtures.
2. Continuing franchise fees – these are the periodic payments made by the franchisee to the
franchisor for the ongoing franchisee support. It is also referred to as royalty fees.
3. Sale of equipment and other tangible assets – in most franchise agreements, the franchisor
provides equipment and other tangible assets to the franchisee for a separate fee.
The transaction price is allocated to the performance obligations based on the relative stand-alone
prices of the distinct goods and services.
The stand-alone is the price at which a promised good or service can be sold separately to a customer.
A performance obligation in the contract is satisfied when the control over a promised good or service is
transferred to the customer.
Revenue is measured at the amount of the transaction price allocated to the satisfied performance
obligation.
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