Batangas State University Lipa

The National Engineering University

LEARNING MODULE
IN
ACC 311

Leading Innovations, Transforming Lives

 Batangas State University Lipa
The National Engineering University

REVENUE FROM
FRANCHISE &
CONSIGNMENT
ARRANGEMENT
CONTRACTS

Leading Innovations, Transforming Lives

 Batangas State University Lipa
The National Engineering University

OBJECTIVES
1. Apply PFRS 15 to account for revenues from and costs of franchise transactions.
2. Apply PFRS 15 to account for revenues from and costs of consignment
arrangements.
3. Account for transactions relating to franchise operations.
4. Account for transactions relating to consignment arrangements.

Leading Innovations, Transforming Lives

 Batangas State University Lipa
The National Engineering University

LICENSING

The licensing section of PFRS 15 provides specific principles that relate directly to the
accounting for franchises. The specific principles are to be applied in addition to the general
principles

PFRS 15 defines a license as on that “establishes a customer’s rights to the intellectual

property of an entity”. Examples of licenses of intellectual property include:
a. Software and technology;
b. Motion pictures, music and other forms of media and entertainment;
c. Franchises; and
d. Patents, trademarks and copyrights.

Leading Innovations, Transforming Lives

 Batangas State University Lipa
The National Engineering University

FRANCHISE
A franchise is a contractual agreement 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 trademarks or trade names or to perform certain functions, usually within a
designated geographical area.

We deal with franchises everyday: a Jollibee fast-food restaurant, a 711 convenience store,
an FM radio station and a public utility vehicle are all example of franchises.

Franchises are of two types:

1. Contractual agreement between two private entities or individuals.
2. Contractual agreement between a private entities or an individual and government.

Leading Innovations, Transforming Lives

 Batangas State University Lipa
The National Engineering University

APPLICATION OF THE BASIC

PRINCIPLES OF PFRS 15
Specific Principles (Licensing Section)

A contact to grant a license to a customer may include other promises to provide additional
goods or services to the customers, whether explicitly stated in the contract or implies by the
entity’s customary business practices. Just like with other types of contracts, the entity shall
apply the general principles in Step 2.

Leading Innovations, Transforming Lives

 Batangas State University Lipa
The National Engineering University

APPLICATION OF THE BASIC

PRINCIPLES OF PFRS 15
The transaction price in a franchise contract is commonly referred to as franchise fees.

1. Franchise fees refer to the fees that the franchisee agrees to pay to the franchisor in a
franchise agreement. The fees may cover the supply of know-how, initial and subsequent
services and equipment and other tangible assets.

Franchisee fees come in the form of:

1. Initial franchise fee- this is one-off payment made by the franchisee to the franchisor to obtain
the franchise right. Initial franchise fees are normally paid at the signing of the franchise fees to
be paid over an extended period of time and provide for the right of refund up to a certain
amount.

Leading Innovations, Transforming Lives

 Batangas State University Lipa
The National Engineering University

APPLICATION OF THE BASIC

PRINCIPLES OF PFRS 15
Aside from consideration for the supply of know-how initial fees may also cover for the
franchisor’s initial services in assisting the franchisee in establishing the new business. Examples
of initial services include the following:
a. Assistance in site selection, lease negotiation, financing, fitting-out of the premises and
supervision of the construction activity
b. Initial training in operating the business
c. Assistance with staff recruitment and training
d. Access to preferential purchasing agreements arrangement the franchise has put in place
e. Provisions of systems (e.g., accounting, information and quality control)
f. Advertisement and promotion
g. Preparations for and execution of the grand opening
h. Initial presence of a trouble shooter for the first few days after the opening

Leading Innovations, Transforming Lives

 Batangas State University Lipa
The National Engineering University

APPLICATION OF THE BASIC

PRINCIPLES OF PFRS 15
2. Continuing franchise fees- these are the periodic payments made by the franchisee to the
franchisor for the ongoing franchisee support. Continuing franchise fees are also referred to as
royalty fees and are usually based on a certain percentage of the franchisee’s sales, but can also
be set up as a fixed amount or a sliding scales and are payable periodically.

In some cases, continuing franchises fees may be charged separately for the following:
a. Management fees – these pay primarily for ongoing franchisee support and are usually
calculated as percentage of franchisee’s sales.
b. Training and conference fees
c. Accounting and other special services fees- in some franchises, the franchisor provides
bookkeeping services or maintains the information system of the franchises. Separate fees
may be charged for these services.

Leading Innovations, Transforming Lives

 Batangas State University Lipa
The National Engineering University

APPLICATION OF THE BASIC

PRINCIPLES OF PFRS 15
d. Marketing services fund – additional fee may be charged as contribution to the national
product advertising and marketing activities of the franchisor.
e. Renewal fund – a fund may be established to cover for the renewal fee of the franchise when it
expires.

Contributions to funds are not recognized as revenue until the related performance obligation is
satisfied.

Leading Innovations, Transforming Lives

 Batangas State University Lipa
The National Engineering University

APPLICATION OF THE BASIC

PRINCIPLES OF PFRS 15
3. Sales 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. Also, the
franchisor may purchase goods centrally and supplies directly to franchisees. A markup,
purchasing fee or handling fee may be charged on tangible assets transferred to frachisees.

Leading Innovations, Transforming Lives

 Batangas State University Lipa
The National Engineering University

CONSIGMENT ARRANGEMENTS

Under a consignment arrangement, an entity (called a

consignor) delivers goods to another party (called the
consignee) who undertakes to sell the goods to end
customers on behalf of the consignor.

Leading Innovations, Transforming Lives

 Batangas State University Lipa
The National Engineering University

CONSIGMENT ARRANGEMENTS
The consignor recognizes revenue only when the consignee sells the consigned good to end
customers.

Consigned goods are included in the consignor’s inventory until they are sold to end customer.
(Memo entries for the transfer of possession from consignor to consignee)

Freight and other incidental costs of transferring consigned goods to the consigner (e.g.,
transportation and insurance) form part of the cost of the consigned goods.

Repair, storage and other maintenance costs are charged as expense.

Commission is recognized as an expense by the consignor and as income by the consignee.

Leading Innovations, Transforming Lives

 Batangas State University Lipa
The National Engineering University

REVENUE RECOGNITION

When the consigned goods are sold to end customers,

-The consignor recognizes revenue at the gross amount of
consideration, i.e., the sales price agreed with the consignee.
-The consignee recognizes revenue at the commission or fee
to which it is entitled.

Leading Innovations, Transforming Lives

 Batangas State University Lipa
The National Engineering University

Open Forum

Leading Innovations, Transforming Lives

 Batangas State University Lipa
The National Engineering University

-END-

Leading Innovations, Transforming Lives