ACCOUNTING

FOR FRANCHISE
OPERATIONS
Learning Outcomes

• Describe a franchise contract.

• Apply the general and specific principles of
PFRS 15 in recognizing revenue from
franchise contracts.
Applicability of PFRS 15

• An entity shall apply the principles set forth

under PFRS 15 Revenue from Contracts with
Customers in accounting for revenues from
contracts with customers, regardless of the
nature of the contract entered into with a
customer.
Core principle

• An entity recognizes revenue to depict the

transfer of promised goods or services to
customers in an amount that reflects the
consideration to which the entity expects to be
entitled in exchange for those goods or services.
Steps in the recognition of revenue
PFRS 15 requires the following steps in recognizing revenue:
• Step 1: Identify the contract with the customer
• Step 2: Identify the performance obligations in the contract
• Step 3: Determine the transaction price
• Step 4: Allocate the transaction price to the performance
obligations in the contract
• Step 5: Recognize revenue when (or as) the entity satisfies a
performance obligation
 
Step 1: Identify the contract with the customer

Requirements before a contract with a customer is

accounted for under PFRS 15:
a. The contract must be approved and the contracting
parties are committed to it;
b. rights and payment terms are identifiable;
c. The contract has commercial substance; and
d. The consideration is probable of collection.

No revenue is recognized if the contract does not meet the

criteria above. Any consideration received is recognized as
liability.
Step 2: Identify the performance obligations
in the contract

Each promise in a contract to transfer a

distinct good or service is treated as a
separate performance obligation.
Identifying distinct goods or services
A good or service is distinct if:
(a) the customer can benefit from it, either on its own
or together with other resources that are readily
available to the customer (e.g., the good or service
is regularly sold separately); and
(b) the good or service is separately identifiable (i.e.,
not an input to a combined output, does not
significantly modify the other promises, or not
highly interrelated with the other promises).
A good or service that is not distinct shall be combined
with the other promises in the contract. Combined
promises are treated as a single performance
obligation.
Example 1
RS Foodgroup operates several restaurants around the world through
franchise agreements. On January 1,2021, RS grants a franchisee the
exclusive right to operate a restaurant using the RS brand in Manila for
three years, and a licenses to operate another branded restaurant in
Makati for three years. However, because of an existing arrangement
with another franchisee, the right in Makati does not begin until
January 1,2022. The license fee is equal to P15,000,000 for each of the
two licenses.
How many performance obligations exist in this contract for franchise
license?
Specific principles
Specific principles - continuation
Specific principles - continuation

• Regardless of the previous requirements (i.e.,

not distinct vs. distinct, right to access vs. right
to use), an entity shall recognize revenue from
sales-based or usage-based royalties when (or
as) those sales or usage occur.
Step 3: Determine the transaction price

• The entity shall determine the transaction price because

this is the amount at which revenue will be measured.

• Transaction price is “the amount of consideration to

which an entity expects to be entitled in exchange for
transferring promised goods or services to a customer,
excluding amounts collected on behalf of third parties
(e.g., some sales taxes).” The consideration may include
fixed amounts, variable amounts, or both.
Step 4: Allocate the transaction price to the
performance obligations

• The transaction price shall be allocated to each

performance obligation identified in a contract based
on the relative stand-alone prices of the distinct
goods or services promised to be transferred.

• The stand-alone selling price is the price at which a

promised good or service can be sold separately to a
customer.
Step 5: Recognize revenue when (or as) the
entity satisfies a performance obligation

• If the performance obligation in the contract is satisfied over time,

revenue is recognized over time as the entity progresses towards the
complete satisfaction of the obligation.  
• If the performance obligation in the contract is satisfied at a point in
time, the entity recognizes revenue when the performance obligation
is satisfied.
• Revenue is measured at the amount of the transaction price allocated
to the satisfied performance obligation.
Example 2
• RS Foodgroup operates several restaurants around the world through
franchise agreements. On January 1,2021, RS grants a franchisee the
exclusive right to operate a restaurant using the RS brand in Manila
for three years, and a licenses to operate another branded restaurant
in Makati for three years. However, because of an existing
arrangement with another franchisee, the right in Makati does not
begin until January 1,2022. The license fee is equal to P15,000,000 for
each of the two licenses.
• When is the licenses fee allocated to the right to operate a restaurant
recognized as revenue?
Measuring progress towards complete satisfaction of a performance
obligation

• For each performance obligation satisfied over time, an entity

shall recognize revenue over time by measuring the progress
towards complete satisfaction of that performance obligation.
• Examples of acceptable measurement methods:
1. Output methods (e.g., surveys of work performed)
2. Input methods (e.g., relationship between costs incurred
to date and total expected costs)

If efforts or inputs are expended evenly throughout the

performance period, revenue may be recognized on a straight-
line basis.
Contract costs

Contract costs include the following:

(a) Incremental costs of obtaining a contract –
recognized as asset if they are recoverable and
avoidable. As a practical expedient, the costs are
recognized as expense if their expected amortization
period is 1 year or less.
(b) Costs to fulfill a contract –if within the scope of PFRS
15, they are recognized as asset if they are: (a)
directly related to a contract, (b) generate or
enhance resources, and (c) recoverable.
Presentation

A contract where either party has performed is presented in

the statement of financial position as a contract liability,
contract asset or receivable.
• Contract liability – is an entity’s obligation to transfer goods
or services to a customer for which the entity has received
consideration (or the amount is due) from the customer.
• Contract asset – is an entity’s right to consideration in
exchange for goods or services that the entity has transferred
to a customer when that right is conditioned on something
other than the passage of time.
• Receivable – is an entity’s right to consideration that is
unconditional.
ADDITIONAL CONCEPTS
Concepts related to Step 2 (Identifying the performance
obligations)

• Non-refundable upfront fee (i.e., initial franchise fee that

covers the provision of the ‘know-how’ and initial
services to set up the contract) is a performance
obligation only if it relates to the transfer of goods or
services. It is not a performance obligation if it relates to
administrative tasks to set up a contract. In the latter
case, the non-refundable upfront fee is treated as a
prepayment and recognized as revenue only when the
related goods or services are transferred to the customer.
ADDITIONAL CONCEPTS

Concepts related to Step 3 (Determining the

transaction price) - continuation
• If the timing of agreed payments provides the
customer or the entity with a significant benefit of
financing, the revenue recognized shall reflect the
cash selling price of the goods or services.