FRANCHISE ACCOUNTING
Franchising is a means of distributing goods or services. A franchise
generally involves the grant from one party (franchisor) to another party 4. PFRS 15 provides that initial franchise fee shall be recognized as
(franchisee), the right to sell the granting party’s goods or services. Each party revenue over time (percentage of completion method) if any one of
contributes resources. the following criteria provided below is met. Which of the
following indicator shows that the initial franchise fee shall be
Characteristics of a Franchise recognized as revenue at a point in time instead over time?
Involves the granting of business rights by the franchisor to a a. When the franchisee simultaneously receives and consumes
franchisee that will operate the franchise outlet in a certain geographical the benefits provided by the franchisor’s performance as the
location. franchisor performs.
The franchisor provides the franchisee with the following services: b. When the franchisor’s performance creates or enhances an
o Assistance in site location – Analyzing the location, Negotiating asset that the franchisee controls as the asset is created or
the lease enhanced.
o Evaluation of potential income c. When the franchisor’s performance does not create an asset
with alternative use to the franchisor and the franchisor has
o Supervision of construction income
an enforceable right to payment for performance completed
o Supervision of construction activity – Obtaining financing,
to date.
Designing building, Supervising contractor while building d. When the franchisee has legal title to the franchise and has
o Provision of bookkeeping and advisory services the significant risks and rewards of ownership of the
o Provision of employee and management training franchise.
o Provision of quality control
5. What is the measurement of franchise revenue recognized from
Franchise Terms franchise agreement?
Initial Franchise Fee a. Fair value of the consideration received or receivable.
- Recorded as revenue only when and as the franchisor makes b. Book value of the consideration received or receivable.
“substantial performance” of the services it is obligated to c. Carrying amount of the consideration received or receivable.
perform, and the collection of the fee is reasonably assured. d. Nominal amount of the consideration received or receivable
Substantial Performance
- No remaining obligation to refund any cash received or excuse
any non-payment of a note. Problem Solving.
- Performed all the initial services required under the contract.
- General Rule: 90% or more of the services required. Problem 1
Franchisor’s Costs On January 1, 2023, MR. JOVEN entered into a franchise agreement
- Match related costs and revenue by reporting them as a with ONG to market their products. The agreement provides for an
component of income in the same accounting period. initial fee of P12,500,000 payable as follows: P3,500,000 to be paid
- Ordinarily defers direct costs. (Direct costs are similar to cost of upon signing of the contract and the balance in five equal annual
goods sold) payments every end of the year starting December 31, 2023. MR.
- Indirect costs should be expensed immediately. (Indirect costs JOVEN signs a non-interest bearing note for the balance. His credit
are charged as operating expenses) rating indicates that he can borrow money at 15% interest for a loan of
Continuing Franchise Fees this type. The PV of an annuity of 1 at 15% for 5 periods is 3.352. The
- Received in continuing rights granted by the franchise agreement agreement further provides that the franchisee must pay a continuing
and for providing such service. franchise fee equal to 3% of the monthly gross sales. On August 31, the
- Reported as revenue when they are earned and receivable from the franchisee completed the initial services required in the contract at a cost
franchisee. of P4,290,120 and incurred indirect cost of P175,000. The franchisee
commenced business operations on November 30, 2023. The gross sales
Three (3) conditions to recognize Initial Franchise Fee: reported to the franchisee were P1,800,000 for December 2023. The first
1. Substantial services performed installment payment was made in due date.
2. Period of refund has lapsed
3. Reasonable collectability
LECTURE DRILLS
Theories.
1. Statement 1: Under IFRS 15, revenue cannot be recognized unless the
franchise agreement is in writing.
1. Assume the collectability of the note is not reasonably assured,
Statement 2: There can only be exactly one performance obligation per
how much is the net income for the year ended December 31,
franchise contract.
2023?
a. Both statements are true
a. 3,126,268
b. Both statements are false
b. 3,201,268
c. Statement 1 is true, statement 2 is false
c. 2,417,268
d. Statement 1 is false, statement 2 is true
d. 3,072,268
2. Under PFRS 15, how shall revenue from contracts with customers such
2. Assume the collectability of the note is reasonably certain, how
as revenue from initial franchise fee be recognized by the franchisor?
much is the net income for the year ended December 31, 2023?
a. Upon receipt of the initial franchise fee by the franchisor.
a. 9,438,880
b. Upon signing of the franchise agreement.
b. 9,384,880
c. When the franchisor satisfies the performance obligation under the
c. 6,027,520
franchise agreement.
d. 6,552,520
d. Applying the legality over the substance of the transaction.
Problem 2
3. Under PFRS 15, how may an entity satisfy a performance obligation in a
contract with customers? On July 1, 2023, MCGREEN INC., a franchisor, entered into a contract
a. Satisfaction of performance obligation over time. with a franchisee for the operation of a restaurant. The franchise
b. Satisfaction of performance obligation at a point in time. agreement provides that the franchisee shall pay a non-refundable
c. Either A or B. upfront franchise fee amounting to P2,500,000 with P500,000 payable
d. Neither A or B.
upon signing of the contract and the balance in five equal semi-annual
payments every December 31 and June 30. The franchisee issued a non-
interest bearing note with effective interest rate of 10%. The present As of the end December 31, 2023, the accounting department of
value of the note is receivable is P1,731,791. The collection of the note franchisor obtained the following information:
receivable is unlikely. The franchise agreement further provides for the
payment of on-going royalties equivalent to 3% based on franchisee’s
sales revenue.
I. The franchisor was able to train seven out of ten personnel of
During 2023, MCGREEN INC. has substantially performed the direct the franchisee.
cost of services required by the franchise in the amount of P1,785,433. II. The percentage of completion of construction of the
In the same year, MCGREEN INC. has also incurred indirect cost franchisee’s building and landscape was estimated by the
amounting to P10,000. For the years 2023 and 2024, the franchisee has engineer and architect at 90% although the building was fully
reported sales revenue amounting to P400,000 and P600,000, completed because the landscape was not yet started.
respectively. III. 600 units of raw materials were already delivered to the
franchisee.
IV. For the year ended December 31, 2023, the franchisor
reported sales revenue amounting to P100,000 because it
1. What is the net income to be reported by Mcgreen Inc. for the already started operation upon the construction of the
year ended December 31, 2023? building on October 1, 2023.
a. 278,307
b. 251,272
c. 236,870 1. What is the total revenue to be reported by the franchisor for
d. 291,470 the year ended December 31, 2023?
2. What is the net income to be reported by Mcgreen Inc. for the a. 509,000
year ended December 31, 2024? b. 635,000
a. 517,579 c. 488,000
b. 529,574 d. 532,000
c. 278,307
d. 378,307
Problem 3
On November 20, 2023, Franchisor authorized a certain Franchisee to
operate for an initial franchise fee of P1,950,000 of which P750,000 was
considered a down payment, and the balance was represented by a note
which was due in 4 equal annual installments starting November 30,
2024. The prevailing rate for similar note is 12%. The period of refund
will elapse on January 31, 2024. As of the end of the year, the franchisor
substantially performed all necessary initial services, but the operations
of the store have not yet started. Collectability of the note is reasonably
certain.
1. What is the amount of unearned franchise fee on December 31,
2023?
a. 1,661,220
b. 750,000
c. 911,220
d. 0
Problem 4
On January 1, 2023, a franchisor entered into a franchise agreement with
a franchisee which requires the latter to pay a non-refundable upfront fee
of P800,000 at the signing of the contract and on-going payment of
royalty equal to 5% of the sales of the franchisee. On the date of the
signing of the contract, the franchisee paid the non-refundable upfront
fee. As part of the franchise agreement, the franchisor shall render the
following performance obligations which are considered separate and
distinct from one another.
I. Training ten personnel of the franchisee with stand-alone
selling price of P100,000.
II. Construction of the franchisee’s building and landscape with
stand-alone selling price of P400,000.
III. Delivery of 1,000 units of raw materials to franchisee with
stand-alone selling price of P300,000.
IV. Allowing the franchisee to use the franchisor’s trademark and
tradename for a term of 10 years starting from January 1,
2023 with stand-alone selling price of P200,000.
