FRANCHISING(PFRS 15)

Franchising is a form of marketing and distribution in which the owner of a

business system (the franchisor) grants to an individual or group of individuals (the
franchisee) the right to run a business selling a product or providing a service using
the franchisor's business system.
Franchisees are also given permission to use the franchisor's branding,
trademarks, and identifying marks under specified guidelines. It is important for
anyone deciding to start a business by becoming a franchisee to remember that in
franchising the franchisee is bound to a partnership agreement with the franchisor
for a defined period of time (some exceptions do exist).
FRANCHISING(PFRS 15)

Initial Franchise Fee – initial payment

Cash
Deferred Revenue
Continuing Franchise Fee
- all direct or indirect cost, expensed immediately
-continuous payment to the franchisor
-based on operations

Cash
Revenue from continuing Franchise Fee

Franchisor- Revenue
Franchisee- Expense
REVENUE RECOGNITION(When Earned? Assurance of
Collectibility)
ACCRUAL BASIS( 100% recognition)
collectability is assured

INSTALLMENT METHOD / GROSS PROFIT METHOD

collectability of unpaid portion is not reasonably assured

COST RECOVERY METHOD

collectability of unpaid portion is uncertain.

WHEN?
-substantial performance-commencement of operation
-nonrefundable
FRANCHISOR COST

DIRECT INCREMENTAL COSTS

Deferred, related to revenue

INDIRECT COSTS
Expensed immediately

COSTS YET TO BE INCURRED

Accrued, charge to income, related to
period to recognize revenue
Assume that Jollibee Inc. charges an initial franchise fee of P5,000,000 for the right
to operate a franchisee of Jollibee. Of this amount, P1,000,000 is payable when the
agreement is signed and the balance is payable in five annual payments of
P800,000 each. In return for the initial franchise fee, the franchisor will help locate
the site, negotiate the lease or purchase of the site supervise the construction
activity, and provide the bookkeeping services. The credit rating of the franchisee
indicates that money can be borrowed at 24%.
• 1. If there is reasonable expectation that the down payment may be refunded
and if substantial future services remain to be performed by Jollibee Inc., the
entry should be:
Assume that Jollibee Inc. charges an initial franchise fee of P5,000,000 for the right
to operate a franchisee of Jollibee. Of this amount, P1,000,000 is payable when the
agreement is signed and the balance is payable in five annual payments of
P800,000 each. In return for the initial franchise fee, the franchisor will help locate
the site, negotiate the lease or purchase of the site supervise the construction
activity, and provide the bookkeeping services. The credit rating of the franchisee
indicates that money can be borrowed at 24%.
• 2. If the probability of refunding the initial franchise fee is extremely low, the
amount of future services to be provided to the franchisee is minimal,
collectability of the note is reasonably assured, and substantial performance has
occurred, the entry should be:
Assume that Jollibee Inc. charges an initial franchise fee of P5,000,000 for the right
to operate a franchisee of Jollibee. Of this amount, P1,000,000 is payable when the
agreement is signed and the balance is payable in five annual payments of
P800,000 each. In return for the initial franchise fee, the franchisor will help locate
the site, negotiate the lease or purchase of the site supervise the construction
activity, and provide the bookkeeping services. The credit rating of the franchisee
indicates that money can be borrowed at 24%.
• 3. If the initial down payment is not refundable, represents a fair measure of the
services already provided, with a significant amount of services still to be
performed by the franchisor in future periods, and collectability of the note is
reasonably assured, the entry should be:
Assume that Jollibee Inc. charges an initial franchise fee of P5,000,000 for the right
to operate a franchisee of Jollibee. Of this amount, P1,000,000 is payable when the
agreement is signed and the balance is payable in five annual payments of
P800,000 each. In return for the initial franchise fee, the franchisor will help locate
the site, negotiate the lease or purchase of the site supervise the construction
activity, and provide the bookkeeping services. The credit rating of the franchisee
indicates that money can be borrowed at 24%.
• 4. If the initial down payment is not refundable and no future services are
required by the franchisor, but collection of the note is so uncertain that
recognition of the note as an asset is unwarranted, the entry should be:
Assume that Jollibee Inc. charges an initial franchise fee of P5,000,000 for the right
to operate a franchisee of Jollibee. Of this amount, P1,000,000 is payable when the
agreement is signed and the balance is payable in five annual payments of
P800,000 each. In return for the initial franchise fee, the franchisor will help locate
the site, negotiate the lease or purchase of the site supervise the construction
activity, and provide the bookkeeping services. The credit rating of the franchisee
indicates that money can be borrowed at 24%.
• 5. Under the same conditions as those listed under 4 except that the
down payment is refundable or substantial services are yet to be
performed, the entry should be: