Franchise

1. DOWNPAYMENT XXX
P.V OF NOTE XXX
INITIAL FRANCHISE FEE (IFF) XXX Revenue from initial services

2. Computation of Net Income:

ACCRUAL Use if the note is “Reasonably Assured”
IFF
(D.C) “Comes Hand in Hand”
GP
CFF Presence of substantial performance
Int. Income Subject to Proration
(Indirect Cost) “Always Meron”
NET INCOME

INSTALLMENT
RGP
CFF
Int. Income
(Indirect Cost)
NET INCOME

3. Initial Franchise Fee (IFF) XXX

Continuing Franchise Fee (CFF) XXX
Revenue from Franchise Fees XXX

4. Initial Franchise Fee (IFF) XXX

Continuing Franchise Fee (CFF) XXX
Interest Income XXX
Total Revenue XXX

5.
ACCRUAL METHOD
Case 1 Case 2 Case 3
SP   X Is there already substantial
performance?
DP  X X Is the down-payment
“nonrefundable”?

IFF  X X
(DC)  X X
GP  X X
CFF   X
Int. Income   
(Indirect Cost)   
NET INCOME XXX XXX XXX
 INSTALLMENT METHOD
Case 1 Case 2

SP  X Is there already substantial

performance?
DP  X Is the down-payment
“nonrefundable”?

RGP  X
CFF  X
Int. Income  
(Indirect Cost)  
NET INCOME

SUBSTANTIAL PERFORMANCE
 where IFF can be recognized immediately as REVENUE.

Indicators of having substantial performance:

1. STATED in the problem.
2. When the franchise business COMMENCED.
 Performance obligation is already satisfied (PFRS 15)
3. There is GROSS SALES given in the problem.

DOWNPAYMENT

 If the problem is SILENT, down payment is NON-REFUNDABLE.

IFRS 15: Revenue Recognition – Franchise Fees

On January 1, 2020, an entity granted a franchise to a franchisee. The franchise agreement requires
the franchisee to pay a nonrefundable upfront fee in the amount of P400,000 and on-going payment
of royalties’ equivalent to 5% of the sales of the franchisee. The franchisee paid the nonrefundable
upfront fee on January 1, 2020.

In relation to the nonrefundable upfront fee, the franchise agreement requires the entity to render
the following performance obligations:
 To construct the franchisee’s stall with stand-alone selling price of P200,000.
 To deliver 10,000 units of raw materials to the franchisee with stand-alone selling price of
P250,000.
 To allow the franchisee to use the entity tradename for a period of 10 years starting January
1, 2020 with stand-alone selling price of P50,000.

On June 30, 2020, the entity completed the construction of the franchisee’s stall. As of December
31, 2020, the entity was able to deliver 3,000 units of raw materials to the franchisee. For the year
ended December 31, 2020, the franchisee reported sales revenue amounting to P100,000.

The entity determines that the performance obligations are separate and distinct from one another.
 1. What is the amount of nonrefundable upfront fee to be allocated to the construction of the
franchisee’s stall?

Performance Obligations:
Construction of franchisee’s stall 200,000 (40%)
Delivery of raw materials 250,000 (50%)
Use of the entity tradename 50,000 (10%)
Total Stand-alone prices 500,000

Nonrefundable upfront fee 400,000

x 40%
Allocated to Construction of franchisee’s stall 160,000

2. What is the amount of revenue to be recognized in relation to the use of delivery of raw
materials for the year ended December 31, 2020?

Nonrefundable upfront fee 400,000

x 50%
Allocated to Delivery of raw materials 200,000
x 3/10
Revenue to be recognized for 2020 60,000

3. What is the amount of revenue to be recognized in relation to the use of entity’s tradename
for the year ended December 31, 2020?

Nonrefundable upfront fee 400,000

x 10%
Allocated to Use of the entity tradename 40,000
x 1/10
Revenue to be recognized for 2020 4,000

4. What is the total revenue to be recognized by the entity for the year ended December 31,
2020?

Initial Franchise Fee (IFF) 224,000

Continuing Franchise Fee (CFF) 5,000
Interest Income -
Total Revenue 229,000

Revenue Recognition – Net Income of Franchisor

On January 1, 2020, an entity granted a franchise agreement to a franchisee. The contract provides
that the franchisee shall pay an initial franchise fee of P500,000 and on-going payment of royalties
equivalent to 8% of the sales of the franchisee.

On January 1, 2020, the franchisee paid downpayment of P200,000 and issued a 3-year non-
interest bearing note for the balance payable in three equal annual installments starting December
31, 2020. The note has present value of P240,183 with effective interest rate of 12%.
As of June 30, 2020, the entity completed the performance obligation of the franchise at a cost of
P352,146. Aside from that, the entity incurred indirect cost of P22,009.

The franchisee started operation on July 1, 2020 and reported sales revenue amounting to P50,000
for the year ended December 31, 2020. The franchisee paid the first installment on its due date.

1. If the collection of the note receivable is reasonably assured, what is the gross profit to be
recognized by the entity for the year ended December 31, 2020 in relation to the initial
franchise fee?
a. P66,028
b. P44,014
c. P22,009
d. P88,037

2. If the collection of the note receivable is reasonably assured, what is the net income to be
reported by the entity for the year ended December 31, 2020?
a. P98,850
b. P94,850
c. P70,028
d. P92,037

3. If the collection of the note receivable is not reasonably assured, what is the gross profit to
be recognized by the entity for the year ended December 31, 2020 in relation to the initial
franchise fee?
a. P60,028
b. P54,236
c. P56,009
d. P45,037

4. If the collection of the note receivable is not reasonably assured, what is the net income to
be reported by the entity for the year ended December 31, 2020?
a. P62,850
b. P64,150
c. P65,049
d. P61,037