FRANCHISE ACCOUNTING

MODULE GOALS/LEARNING
OBJECTIVES:
• Journalize franchising transactions
• Determine earned and unearned franchise
revenue under PAS 18
• Apply PFRS 15 in accounting for franchise
revenue
What is Franchise?
It is an arrangement where one party
(the franchisor) grants another party
(the franchisee) the right to use its
trademark or trade-name as well as
certain business system and processes,
to produce and market a good or service
according to certain specifications.
PFRS 15 vs PAS
18
PFRS 15 (Five-Step Model)

1. Identify the contract with the customer.

• Franchisor – franchisee relationship
2. Identify the performance obligations in the contract.

• Assistance in site selection

• Initial and ongoing training of employees
• Construction of stall
• Supply of inventories and equipment
• Allow the use of tradename for a period of
time
3. Determine the transaction price.
The franchise fees paid/to be paid by
the franchisee:
• Initial/ Continuing
• Refundable/ Nonrefundable
• Lump Sum/ Down Payment + Note
4. Allocate the transaction price to the performance obligations.

• Allocate using the stand-alone selling

prices of each performance
obligation.
5. Recognize revenue.
• Identify the timing of revenue
recognition for each performance
obligation.
Sample Problem:
On March 1, 2020, AshLloyd entered into a franchise contract with AshMatt. The franchise agreement required the
franchisee, AshMatt, to pay a nonrefundable upfront fee in the amount of P1,440,000 and on-going payment of
royalties equivalent to 5% of the sales of the franchisee. AshMatt paid the non-refundable upfront fee on January 1,
2020. In relation to the nonrefundable upfront fee, the franchise agreement required AshLloyd to render the
following performance obligations:
• To construct the franchisee’s stall with stand-alone selling price of P300,000.
• To supply cooking equipment and cash registers. Price of competitors for the similar items (cooking equipment
and cash registers) is valued at P240,000 while the forecast of the expected cost of AshLloyd for the performance
obligation is P200,000 plus an appropriate margin above cost of 25%.
• To deliver 10,000 units of raw materials to AshMatt with stand-alone selling price of P460,000.
• To allow AshMatt to use the entity’s tradename for a period of 10 years starting on the inception of the contract
with stand-alone selling price of P600,000.
During the year 2020, AshLloyd satisfied its performance obligations to supply cooking equipment and install cash
registers, constructed the franchisee’s stall and was able to deliver
6,000 units of raw materials to AshMatt. For the year ended
December 31, 2020, the franchisee reported sales revenue
amounting to P720,000.
Determine total income reported by AshLloyd on 2020.
Solution:
PAS 18 (S-C-P)
Given the following:

- Initial fee is 250,000, 50,000 down and the

balance to be paid annually for four years at
10% interest.
Case 1 (Future services required is minimal,
probability of refunding is remote, note most likely to be
collected)

- 250,000 recognized as earned

revenue.
Case 2 (Substantial future services yet to be
provided)

- 250,000 recognized as unearned

revenue.
Case 3 (Down payment represents services already
performed by the franchisor)

- 50,000 recognized as earned revenue.

- 200,000 recognized as unearned
revenue.
THANK YOU!