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    © All Rights Reserved
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    973 views39 pages

    7 Franchise

    Uploaded by

    Marjhon Tubilla

    Copyright:

    © All Rights Reserved
    Download as PDF or read online from Scribd
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    of 39
    Pranchisce [License 216 Franchise ‘The core principle of IFRS 15 is that an entity will recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This core principle is delivered in a five-step model framework: 1. Identify the contract with a customer 2. Identify all the individual performance obligations within the contract 3. Determine the transaction price 4, Allocate the price to the performance obligations 5. Recognize revenue as the performance obligations are fulfilled ‘The specific provision of the standards that deals with the accounting for franchise can be found on the licensing topic of PFRS 15. A Franchise is a type of license that a party (franchisee) acquires to allow them to have access to a business (the franchisor) proprietary knowledge, processes and trademarks in order to allow the party to sell a product or provide a service under the business name. Two types of Franchise 1. Acontract between two private entities or individuals. 2. A contract between private entity or an individual and the government. Under the licensing section of PFRS 15, the promise to grant the license must be determined first whether the license of Intellectual Property (IP) is distinct or not because PFRS 15 includes specific application guidance for distinct licenses of IP. For licenses that are not distinct, an entity will follow the general requirements in the standards to account for all promises as a single performance obligation (that contains a license and at least one other good or service). For distinct licenses of IP, the promise to grant a license is treated as a separate performance obligation from other promises in the contract. An entity must determine whether the license transfers to the customer at a point in time or over time by considering the nature of the promise to the customer. The standard states that entities provide their customers with either: - A right to access the’ entity’s intellectual property as it exists throughout the license period, including any changes to that intellectual property, which is recognized as revenue over time. ‘Therefore, the consideration received is recognized as revenue over the license period. Franchisee [License 217 A right to use the entity’s intellectual property as it exists at the point in time when the license is granted, which is recognized as revenue at a point in time. Therefore, the consideration received is recognized as revenue at the time the license is provided. pight to Access (Over Time| customer has the right to access the entity's IP as it exists throughout the The *- period if the customer cannot direct the use of, and obtain substantially aa the remaining benefits from, the license at the point in time at which the license is granted. alicense is a promise to provide a right to access if all of the following criteria met: ‘ tthe contract requires, or the customer reasonably expects, that the entity "ill undertake activities that significantly affect the intellectual property to which the customer has rights. 9, The rights granted by the license directly expose the customer to any positive or negative effects of the entity’s activities. . The entity’s activities do not result in the transfer of a good or a service to the customer as those activities occurs (i.e., they do not represent a separate performance obligation). Although not determinative, the existence of a shared economic interest between the parties (e.g., sales or usage-based royalties) may be an indicator that the customer has a reasonable expectation that the entity will undertake such activities. Right to Use (At a Point in Time) The customer has the right to access the entity’s IP as it exists throughout the license period if the customer can direct the use of, and obtain substantially all of the remaining benefits from, the license at the point in time at which the license is granted. Ifthe license does not meet all three criteria, the license agreement provides a right to use the license and the entity would recognize revenue at the point in time when the control of the license transfers to the customer. Sales Based or Usage Based Royalties The standard provides explicit application guidance for recognizing sales-based and usage-based royalties from licenses of IP. Specifically, the standard creates an exception to the requirement to estimate variable consideration for transactions that involve sales and usage-based royalties resulting from the Franchisee [License 218 licenses of IP. As a result, these amounts are only recognized at the later of when; 1. The sale or usage occurs or 2. The performance obligations (to which some or all of the sales or usage. based royalties have been allocated) have been satisfied (or partially satisfied). This exception may result in an accounting treatment that is similar to current practice. FRANCHISE REVENUES 1. Initial Franchise Fees - it is a once off lump sum, paid by the franchisee to the franchisor, upon signing the franchise agreement. It acts as a payment financing’ and leased negotiation, for: selection, a, Assistance in site supervision of construction activity. Initial training in all facets of operating a business b. Assistance with staff recruitment and training c. Access to preferential purchasing arrangements the franchisor has put in place. Provision of bookkeeping and advisory services Provision of quality control g. Advertising and promotion h. Assistance in the acquisition of signs, fixture and equipment Continuing Franchise Fee (Royalty Fee) - it is a fee paid by the franchisee for the ongoing services (e.g. management trainings, advertising, promotion, 2. accounting, legal assistance and other special services received from the franchisor. Typically it is computed based on a percentage of gross sales of franchisee and it is paid on a regular basis. Prelit ny ag y of PFRS 15 for Licenses DISTINCT Account the license as a separate performance obligation Right to Access Right to Use the IP the IP Over Time Point in (Point In Time! : Time Revenue is Apply i geni recognized at the | to ice ee ee Guidance time when the Performance Has Right to access obligation is Saisie if the following at a point in time, time or criteria are met: The contract requires or customers expect the IP will change and customer has to change IP. b. Right granted by the license may have negative or positive effects on the customer c. No further transfer of good or services license is granted. The intellectual Property (IP) does not change throughout the license period. a. The IP changes throughout the license period. 1. The entity continues to be involved with the IP. 2. The entity undertakes activities that significantly affect the IP. Pranchisee License 220 EXERCISES PFRS 15 Revenue from Contracts with Customers Problem 1: Unilab entered into licensing agreement with Pharex for a new drug known as “AntiCOV” Unilab will receive an amount of P1 billion if “anticov’ received approval from Food and Drug Administration (FDA). Based on prior approval, Unilab determined that it is 80% likely that “AntiCOV” will receive an approval. How much is the transaction price? a. P1,000,000,000 c. P200,000,000 b. P800,000,000 d. PO until approved by FDA . Answer B Suggested Solution: P12 billion x 80% = P800 million Interest Bearing Note Problem 2: Maipao Corporation sells computer software to Mr. Bong. Mr. Bong shall pay P750,000 upfront fee in exchange for the following performance obligations: (1) equipment (2) initial training and (3) five years right over the . computer software. The stand-alone selling price of the equipment is P380,000. ‘The stand-alone selling price of the initial training is P280,000. The entity estimates the stand-alone selling price of the five year right over the computer software using the residual approach. On February 1, 20x1, Maipao receive the P150,000 cash and the balance payable in three annual payments beginning January 30, 20x2. Mr. Bong signs a 10% interest bearing for the balance. On August 1, Maipao has already transferred the equipment and conducted the initial training and the software license will commence on the same date. The entity determines that the performance obligations in the contract are distinct. Req. 1 Assume Mr. Bong has the right use the intellectual property, the journal entry on February 1, 20x1 will include: a. Debit Cash of P750,000 b. Credit Unearned Interest Income of P100,000 c. Debit Notes receivable of P600,000 d. Credit License Revenue ~ Software of P100,000 Req. 2: Assume Mr. Bong has the right to use the intellectual property, the total revenue from license contract of Maipao Corporation on August 1, 20x! is: a. P662,500 c. P795,000 b. P650,000 d. P740,000 Precive ldeone 294 Mr. Bong has the right access the intellectual sume c. P662,500 2 FPSO d. P650,000 p7i7s answer 1.2) 3) A ae ested Solution: Re | 150,000 cas ea 600,000 Notes ree License Revenue - Software unea! ‘ed Sales Revenue - Equipment oe d Service Revenue ~ Training ine Req: 2 e 90,000 seca 380,000 Equip 270,000 ‘raining 740.0007 ‘otal 000 3 eer yare (90,000 / 3 yrs x 5/12) 12,500 vee 380,000 eats 270,000 inin K eat incon (600,000 x 10% x 11/12) 55,000 Total 717,500 S00 Maipao Corporation on December 31, 20x1 gy Pet the 90,000 380,000 280,000 Problem 3: Smith Inc. is a provider of computer and software. The customers can purchase any product or service from the entity in a bundled package or separately. On January 2, 20x1, Tronx Company acquired computers, software installation and training services for a total amount of P870,000. The standalone selling prices of the computer, software installation and training services are P543,750; 362,500 and P181,250, respectively. Req. 1: How much is the transaction price allocated to computers. a. P870,000 ©. P435,000 b. P725,000 : d. P290,000 Req. 2: The journal entry to record the transaction will include a: & Credit Sales Revenue - Installation of P362,500 b. Credit Sales Revenue of P290,000 © Debit Unearned Service Revenue - Training of P181,250 4. Credit Unearned Service Revenue - Training of P145,000 Franchisee |License 222 Answer 1) C 2) D Suggested Solution: Req. 1 Computer 543,750 543,750/1,087,500 435,000 Installation 362,500 362,500/1,087500 290,000 Trainings 181,250_ 181,250/1,087,500 _145,000 087,500. 870000 Req. 2 Cash 870,000 Unearned Sales revenue 435,000 Unearned Service revenue - installation 290,000 145,000 Unearned Service revenue - training Problem 4: On January 1, 20x1, LOMI Ko charges initial fee P8,000,000 for franchise, with P1,600,000 amount paid when the agreement was signed by both parties and the balance in four equal annual payments. The present value of the four equal annual payments is P5,070,000, which is discounted at 10%. The franchisee has the right to purchase P300,000 of supplies and equipment for P250,000. An additional part of the initial fee is for advertising to be provided by LOMI Ko during the next five years. The amount of advertising is P5,000 a month. The collectability is reasonable assured and LOMI Ko has performed all the initial services provided in the contract. Req. 1: how much is the revenue from franchise? a. P6,670,000 c. P6,320,000 b. P8,000,000 d. P7,650,000 Req. 2: The journal entry to record the transaction would include? a. Debit Cash of P8,000,000 b. Credit Unearned Interest Income P1,680,000 c. Credit Unearned Franchise Revenue P350,000 d. Credit Franchise Revenue of P6,670,000 Answer 1) C 2)C Suggested Solution: Req. 1 PV of Notes receivable 5,070,000 Face Value ofNotes 6,400,000 Down payment 1,600,000_ PV of Notes 5,070,000 6,670,000 Unearned Interest 1,330,000 Adjusted Franchise Fee Bargain Purchase [300-250] (50,000) Advertising [5K x 60 months] (300,000) Franchise Revenue 6,320,000 Pranchisee [License 223 Req. 2 Cash 1,600,000 Notes Receivable 6,400,000 Unearned Interest Income 1,330,000 Franchise Revenue 6,320,000 Unearned Franchise Revenue [300 + 50] 350,000 Notes: 1, Bargain Purchase - record a portion of the initial franchise fee as uneamed revenue (deferred), which will increase the selling price when the franchisee subsequently makes the purchases of the equipment or supplies or at the time equipment or supplies will be delivered. 2. The P300,000 initial fee allocated to advertising shall be deferred and shall be recognize as revenue over time for 5 year period. Problem 5: Ivonne enters into a contract for 2 years with Irvin to transfer a license. The agreement signed on January 2, 2025 called for a P30,000 down payment plus a 10% interest bearing note of P20,000 payable in two annual payments starting December 31, 2025. The license provides that Irvin has the right to use the secret formula to produce healthy juice. The license does not explicitly require Ivonne to undertake activities that will significantly affect the secret formula to which Irvin has rights. The collectability of the note is reasonably assured. Req. 1: What is the total revenue to be recognized on December 31, 2025? a. P20,000 c. P52,000 b. P50,000 d. P41,000 Req. 2: Assume that the license provides Irvin the right to access the secret formula to produce healthy juice. Irvin is bound by the terms of the contract to follow with the policies on the use of the secret formula by Ivonne but is given the right to any subsequent modifications to the secret formula. What is the total revenue to be recognized on December 31, 2025? a. P27,000 c. P50,000 b, P25,000 d, P21,000 Answer 1) C 2) A Suggested Solution: Req. 1 Cash Down payment 30,000 Notes receivable ‘ 20,000 Interest Income (20,000 x 10%) 2,000 Total Revenue 52,000 Franchisee |License 224 The customer can direct the use of, and obtain substantially all of th remaining benefits from the license at the point in time at which is grantel because the secret formula will not change. Irvin has the right to use the secret formula. Therefore, the performance obligation is satisfied at a point in time The transaction price is recognized as revenue in full when the secret formula ig transferred to Irvin. Req. 2 Cash Down payment 30,000 Notes receivable 20,000 Total 50,000 Divide by 2 years Revenue - 2025 25,000 Interest Income (20,000 x 10%) 2,000 27,000 Total Revenue The customer cannot direct the use substantially all of the remaining benefits from the license at the point in time at which the license is granted since the secret formula changes throughout the license period which is evidence by the continuing involvement of the entity with the secret formula and its undertaking of activities that significantly affect the secret formula.to which the customer has rights. Therefore, the performance obligation is satisfied over time since Irvin has only the right to access the entity’s secret formula. Non-Interest Bearing Note Problem 6: Ivonne enters into a contract for 2 years with Irvin to transfer a license. The agreement signed on January 2, 2025 called for a P30,000 down payment plus a 10% non-interest bearing note of P20,000 payable in two annual payments starting December 31, 2025. The management of Irvin Co. has estimated that they can borrow a loan of this type at the rate of 10%. The present value factor of an ordinary annuity at 10% for 2 periods is 1.7335. The license provides that Irvin has the right to use the secret formula to produce healthy juice. The license does not explicitly require Ivonne to undertake activities that will significantly affect the secret formula to which Irvin has rights. The collectability of the note is reasonably assured. : What is the total revenue to be recognized on December 31, 2025? Req. a. P49,069 c. P28,268 b. P50,000 d. P47,335 Req. 2: Assume that the license provides Irvin the right to access the secret formula to produce healthy juice. Irvin is bound by the terms of the contract to follow with the policies on the use of the secret formula by Ivonne but is given the right to any subsequent modifications to the secret formula. Pranchiwe Neen 295 What is the total revenue to be recognized on December 31, 2025? a. 23,668 ©. PA7,335 b. P25,000 d. P25,401 Answer 1) A 2) D Suggested Solution: Req. 1 Right to use — Point in Time {nitial contract fee 50,000 Down payment (30,000) Notes Receivable 20,000 Divide by no. of collections 2 Installment Collections 70,000" PV factor 1.7335, PV of Notes receivable 17,335 Down payment 30,000 Adjusted contract Fee 47,335 Adjusted contract Fee 47,335 Interest Income (17,335 x 10%) 1.734 Total Revenue 35 085" Req. 2: Right to access ~ Over Time Adjusted contract Fee 47,335 Divide by 2years Revenue - 2025 23,668 Interest Income (17,335 x 10%) 1.734 Total Revenue 35,401 Problem 7: Black Skup Inc. operates and franchises coffee shops around the Philippines. On January 1, 2020, Black Skup entered into a franchise agreement with a franchisee for a non-refundable initial franchise ice of 8,000,000 payable upon signing of contract and ongoing payment of royalties, based on 5% of franchisee’s sales. The contract provides that Black Sup shall tender the following obligations to franchisee: (1) Construction of the cofiee shop and delivery of coffee shop equipment's with stand-alone selling price of P5,000,000; (2) Supplies of 100,000 units of coffee raw materials and supplies with stand-alone selling price of P3,000,000; and (3) Allowing the franchisee the Tight to access the Black Skup’s trademark and tradename for a period of 10 years with stand-alone selling price of P2,000,000 starting January 1, 2020. Black Skup determines that the three obligations under the contract with franchisee are each distinct, and therefore, need to be accounted for 26 # separate performance obligations. Pranchtsce |License 226 As of July 1, 2020, Black Skup has already completed the construction of the building and has fully delivered the relevant coffee shop equipment's. However, only 40,000 units of coffee raw materials and supplies have been delivered to the franchisee and eventually consumed by the coffee shop customers as of December 31, 2020. For the year ended December 31, 2020, the franchisee reported sales revenue of P1,000,000. How much total revenue shall be reported by Black Skup Inc. for the year ended December 31, 2020? a. P5,170,000 cc. P5,820,000 b. P6,410,000 d. P4,930,000 Answer A Suggested Solution: Coffee Shop & Equipment’s 4,000,000 x 100% 4,000,000 Supplies 2,400,000 x 40,000/100,000 960,000 Tradename 1,600,000/10 years 160,000 Royalties 5% x 1,000,000 50,000 Total 5,170,000 Stand Alone Allocated Selling Price Upfront Fee Coffee Shop & Equipment’s 5,000,000 50% 4,000,000 Supplies 3,000,000 30% 2,400,000 Tradename 2,000,000 20% __1,600,000__ Total 10,000,000 8,000,000 Problem 8: Paul, franchisor, entered into a five-year franchise agreement with Anton, franchisee, on July 1, 2025. The total franchise fee agreed upon is P550,000, of which P50,000 is payable upon signing and the balance is covered by a non ~ interest bearing note payable in four equal annual installments. It was agreed that the down payment is not refundable. The direct franchise cost incurred was P325,000. The management of Paul has estimated that they can borrow a loan of this type at the rate of 12%: The franchisee commenced its operations on July 31, 2025. The contract provides that the franchisee has the right to use the entity’s intellectual property as it exist at the point in time at which the franchise is granted. Req. 1: How much is the net income (loss) to be reported on July 31, 2025? (Use PV factor of 3.04). a. P105,000 c. P433,800 b. P108,800 d. P430,000 re Franchisee [License 227 g the customer has the ight to access the e: tellectual a pasa sneome (loss) will be on December 31, 2025: rope ©. P43,800 PA 722,800 d. P31,550 if 108,800 Id include:

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