Accounting for

Franchise Fees
(Franchisor)
ICARE Accountancy Review, Inc.
Advanced Financial Accounting and Reporting (AFAR)
Types of franchise fee

1. Initial franchise fee

2. Royalty or continuing
franchise fee
Accounting for initial franchise fees

 Pre-IFRS 15 Revenue from Contracts with Customers (see flowchart)

 Post-IFRS 15 Revenue from Contracts with Customers (use the 5-step model)
Initial Service
Installment method (illustration)

 Example:
 ABC Company sells an item costing P60 to a customer at a selling price of
P100. ABC uses the installment method of recognizing revenue for internal
reporting purposes. ABC has collected P30.
Installment method (illustration) -
continued COGS

Customer

P30

Seller

Gross Profit
IFRS 15 - 5 Step Model

 Step 1: Identify the contract(s) with a customer.

 Step 2: Identify the performance obligations in the contract.
 Step 3: Determine the transaction price.
 Step 4: Allocate the transaction price to the performance obligations in the
contract.
 Step 5: Recognize revenue when (or as) the entity satisfies a performance
obligation.
Revenue at a point in time or over time?

 Over time if:

 Customer simultaneously receives and consumes the benefits provided by the
entity’s performance as the entity performs; or
 Entity’s performance creates or enhances an asset that the customer controls as
the asset is created or enhanced; or
 Entity’s performance does not create an asset with an alternative use and the
entity has an enforceable right to payment for performance completed to date
Right to access

 Criteria:
 It is required or expected that entity will undertake activities that significantly
affect the intellectual property
 Rights grants directly expose the customer to any positive or negative effects due
to the activities above
 Activities do not result in the transfer of a good or of a service

ACCOUNT OVER TIME

Right to use

 Customer can direct the use and obtain substantially all of the remaining
benefits

ACCOUNT AT A POINT IN TIME

Accounting for Sales-Based Royalty

 Revenue at the later of the following events:

 Subsequent sale occurs
 Performance obligation to which some or all of the sales-based royalty has been
allocated has been satisfied