Lipa City Colleges

c
College of Accountancy

Advanced Financial
Accounting and Reporting
Part 1
BSA – 3A
 Lipa City Colleges
College of Accountancy

Franchise Accounting
 Lipa City Colleges
College of Accountancy

Applicable Accounting Standard

PFRS 15 Revenue from Contracts with Customers

Supersedes PAS 18 Revenue

- PFRS 15 relates accounting for franchises on the “licensing”

section. License means “one that establishes a customer’s rights to
the intellectual property of an entity.” (e.g. software, franchises,
patents, trademarks and copyrights)

- Franchisor’s perspective
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College of Accountancy

Revenue Recognition Timing

- If the customer has the right to access the intellectual property as
it exists throughout the license period, the performance
obligations is satisfied over time. Therefore, the amount of
consideration allocated to the promise to grant the license is
recognized as revenue over the license period.

- If the customer has the right to use the intellectual property as it

exists at the point in time at which the license is granted, the
performance obligation is satisfied at a point in time. Therefore,
revenue is recognized at the time when the license is provided.
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College of Accountancy

Revenue Recognition Timing

Timing Rationale Examples
Point in time Revenue is recognized at a point in time because there - Software
is no explicit or implicit obligation for the entity to - Biological
undertake activities during the license period to (a) compounds
change the form or functionality of the intellectual - Drug formulas
property or (b) support or maintain the value of the - Copies of media
intellectual property during the license period content (e.g. films,
television shows,
music)
Over time Revenue is recognized over time because the - Brand names
intellectual property’s design or functionality changes - Franchise rights
over time or because the customer’s ability to obtain - Logos and team
benefits from the intellectual property is substantially names
derived from, or dependent on, the company’s ongoing
activities that will be performed over the license
period.
 Lipa City Colleges
College of Accountancy

Franchise
- A contractual arrangement under which the franchisor grants the
franchisee the right to sell certain products or services, to use
certain trademarks or names, or to perform certain functions,
usually within a designated geographical area.
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College of Accountancy

Two Type of Franchise

1. Contractual arrangement between two private entities or
individuals
2. Contractual arrangement between a private entity or and
individual and the government
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College of Accountancy

Franchise Revenues
1. Initial Franchise Fee (IFF)
This represents initial payment for establishing the franchise agreement, paid by the
franchisee to the franchisor. It can be paid through cash or for an extended period of time
(e.g. notes payable). It acts as a payment for:
a. Assistance in site selection, leased negotiation, financing and supervision of construction
activity.
b. Initial training in all facets of operating a business
c. Assistance with staff recruitment and training
d. Access to preferential purchasing arrangements the franchisor has put in place.
e. Provision of bookkeeping and advisory services
f. Provision of quality control
g. Advertising and promotion
h. Assistance in the acquisition of signs, fixture and equipment

2. Continuing Franchise Fee (CFF)

This represents continuous payment to the franchisor for providing specific future services,
such as advertising, and for the continued use of intangible rights by the franchisee.
 Lipa City Colleges
College of Accountancy

Example 1. Assume the following information:

On January 5, 2019, Jobee Corporation granted a franchise to Mr. Jolly to sell Jobee products for a period of 5
years. The agreement provides that Mr. Jolly should pay an initial franchise fee of P1,000,000 and a continuing
franchise fee of 2% of Mr. Jolly’s sales payable at the end of each month.

For the year 2019, Mr. Jolly generated total sales of P4,000,000.

Provide journal entries to be made by Jobee Corporation on December 31, 2019.

Jan 5, 2019
Cash 1,000,000
Contract/Deposit Liability 1,000,000
To record receipt of IFF

Dec 31, 2019 1,000,000 / 5 years

Deposit Liability 200,000
Revenue 200,000
To recognize revenue from IFF
4,000,000 x 2%
Receivable 80,000
Revenue 80,000
To recognize revenue from CFF.
 Lipa City Colleges
College of Accountancy

Example 2. Assume the following information:

On January 5, 2019, Jobee Corporation granted a franchise to Mr. Jolly to sell Jobee products for a period of 5
years. The agreement provides that Mr. Jolly should pay an initial franchise fee of P1,000,000 payable as follows:
- 20% upon signing of the contract 1,000,000 x 20% = 200,000
- 80% through a non-interest bearing note payable in 5 equal annual installment starting December 31, 2019.
The appropriate discount rate is 10%. The PV factor of an ordinary annuity at 10% for five periods is 3.7908.
1,000,000 x 80% = 800,000 800,000 / 5 years = 160,000 160,000 x 3.7908 = 606,528
Also, a continuing franchise fee of 2% of Mr. Jolly’s sales payable at the end of each month should be paid by Mr.
Jolly to Jobee Corporation. For the year 2019, Mr. Jolly generated total sales of P4,000,000.

Provide journal entries to be made by Jobee Corporation.

Dec 31, 2019 806,528 / 5 years = 161,306
Jan 5, 2019
Deposit liability 161,306
Cash 200,000
200,000 + 606,528 Revenue 161,306
Note receivable 800,000
To recognize revenue from IFF
Deposit liability 806,528
606,528 x 12% = 72,783
Unearned interest income 193,472
Unearned interest income 72,783
To record receipt of IFF
Interest income 72,783
To record interest income from the note receivable

Receivable 80,000
Revenue 80,000
To recognize revenue from CFF.
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College of Accountancy

Costs and expenses of franchise

1. Direct cost – initially recognized as asset (deferred cost) and
amortized as expense on a systematic basis. Considered as cost of
the franchise (same as cost of goods sold).
2. Indirect costs – expensed immediately
 Lipa City Colleges
College of Accountancy

Example 3. Assume the following information:

On January 5, 2019, Jobee Corporation granted a franchise to Mr. Jolly to sell Jobee products for a period of 5 years. The
agreement provides that Mr. Jolly should pay an initial franchise fee of P1,000,000 payable as follows:
- 20% upon signing of the contract
- 80% through a non-interest bearing note payable in 5 equal annual installment starting December 31, 2019. The
appropriate discount rate is 10%. The PV factor of an ordinary annuity at 10% for five periods is 3.7908.

Also, a continuing franchise fee of 2% of Mr. Jolly’s sales payable at the end of each month should be paid by Mr. Jolly to Jobee
Corporation. For the year 2019, Mr. Jolly generated total sales of P4,000,000.

Jobee Corporation incurred direct costs of 250,000 and indirect costs of 40,000 in January 2019 in relation to the franchise.

Provide journal entries to be made by Jobee Corporation.

Jan 5, 2019 Dec 31, 2019

Cash 200,000 Deposit liability 161,306
Note receivable 800,000 Revenue 161,306 250,000 / 5 years = 50,000
Deposit liability 806,528 To recognize revenue from IFF
Unearned interest income 193,472 Cost of franchise 50,000
To record receipt of IFF Unearned interest income 72,783 Deferred franchise cost 50,000
Interest income 72,783 To record cost of the franchise

Deferred franchise cost 250,000

Receivable 80,000
Expenses 40,000
Revenue 80,000
Cash 290,000
To recognize revenue from CFF.
To record costs and expenses incurred.