ACCOUNTING FOR SPECIAL

TRANSACTIONS – FRANCHISE
ACCOUNTING
Most Famous Franchise Business in the Philippines:
1. Jollibee – Php25,000,000.00 to start a franchise
2. Potato Corner - Php200,000.00 for the smallest cart to Php1,200,000.00
3. 7-Eleven – aroung Php3,500,000.00
4. Petron – from Php1,000,000.00 to Php2,500,000.00 exclusive of a cash bond of
Php100,000.00.
5. The Generics Pharmacy – from Php290,000.00 to Php750,000.00
FRANCHISE ACCOUNTING
 is a privilege granted to a third party to market a product or service, usually under a
trademarked name. In return, the franchisee pays a fee to the franchisor, which is
usually based on a percentage of the sales generated by the franchisee.

 Franchisor - is the party that grants business rights related to a franchise.

 Franchisee - is the party that commits to operate the franchised entity.

Franchise Accounting – Franchisor PoV

PFRS 15 - REVENUE FROM CONTRACTS WITH CUSTOMERS

STEP 1 : IDENTIFY THE CONTRACT(S) WITH THE CUSTOMER

STEP 2: IDENTIFY THE PERFORMANCE OBLIGATIONS IN THE

CONTRACT

STEP 3 : DETERMINE THE TRANSACTION PRICE

STEP 4 : ALLOCATE THE TRANSACTION PRICE

STEP 5 : RECOGNIZE REVENUE WHEN A PERFORMANCE

OBLIGATION IS SATISFIED
STEP 1 : IDENTIFY THE CONTRACT
 Parties have approved the contract
 Each party’s rights regarding the goods or services to be transferred are identifiable
 Payment terms are identifiable
 Contract has commercial substance
 It is probable that the consideration will be collected
 When above criteria are not met, re-assess the contract going forward to determine whether the
criteria are subsequently met.
 What is the treatment of payments received from a customer prior to the satisfaction of the
criteria?
 No revenue is recognized on the contract that does not meet the above criteria. Any
consideration received from such contract is recognized as a liability and recognized as revenue
only when either of the following has occurred:
1. The entity has no remaining obligation to transfer goods or services to the customer and all, or
substantially all, of the consideration has been received and non-refundable
2. The contract has been terminated and the consideration received is non-refundable
STEP 1 : IDENTIFY THE CONTRACT
 An entity, a real estate developer, enters into a contract with a customer for the sale of
a building for Php1,000,000.00. The customer intends to open a restaurant in the
building. The building is located in an area where new restaurants face high levels of
competition and the customer has little experience in the restaurant industry. The
customer pays a non-refundable deposit of Php50,000 at inception of the contract and
enters into a long-term financing agreement with the entity for the remaining 95% of
the promised consideration. The financing arrangement is provided on a non-recourse
basis, which means that if the customer defaults, the entity can repossess the building,
but cannot seek further compensation from the customer, even if the collateral does
not cover the full value of the amount owed. The entity's cost of the building is
Php600,000. The customer obtains control of the building at contract inception.
STEP 1 : IDENTIFY THE CONTRACT
 An entity licenses a patent to a customer in exchange for a usage-based royalty. At
contract inception, the contract meets all the criteria in IFRS 15 and the entity
accounts for the contract with the customer in accordance with the requirements in
IFRS 15. The entity recognizes revenue when the customer's subsequent usage occurs
in accordance with IFRS 15. During the second year of the contract, the customer
continues to use the entity's patent. However, the entity learns that the customer has
lost access to credit and its major customers and thus the customer's ability to pay
significantly deteriorates. The entity therefore concludes that it is unlikely that the
customer will be able to make any further royalty payments for ongoing usage of the
entity's patent. As a result of this significant change in facts and circumstances, in
accordance with IFRS 15, the entity reassesses the criteria and determines that they
are not met because it is no longer probable that the entity will collect the
consideration to which it will be entitled.
STEP 2 : IDENTIFY THE PERFORMANCE OBLIGATIONS
 Performance obligations - promised good or service that is distinct.
 A good or service is distinct if:
 The customer benefits from the good or service on its own, or together with other
readily available resources.
 The good or service is separately identifiable from other goods or services in the
contract.
 If a promised good or service is not distinct, it should be combined with other
promised goods or services until they become distinct together (a bundle). Such a
bundle is then treated as a single performance obligation.
STEP 2 : IDENTIFY THE PERFORMANCE OBLIGATIONS
 A software developer, enters into a contract with a customer to transfer a software license,
perform an installation service and provide unspecified software updates and technical support
(online and telephone) for a two-year period. The entity sells the license, installation service and
technical support separately. The installation service includes changing the web screen for each
type of user (for example, marketing, inventory management and information technology). The
installation service is routinely performed by other entities and does not significantly modify the
software. The software remains functional without the updates and the technical support.
STEP 3 : DETERMINE THE TRANSACTION PRICE
 Transaction Price – 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.
 The nature, timing, and amount of consideration promised by a customer affect the estimate of
the transaction price. When determining the transaction price, an entity shall consider the effects
of all of the following:
a. Variable consideration
b. Constraining estimates of variable consideration
c. The existence of a significant financing component in the contract
d. Noncash consideration
e. Consideration payable to a customer
 The transaction price in a franchise contract is commonly referred to as Franchise Fee.
STEP 3 : DETERMINE THE TRANSACTION PRICE
 Franchise Fees – refers 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.
 Franchise fees come in the form of:
1. Initial Franchise Fee – This is the one-off payment made by the franchise fees are normally paid at
the signing of the franchise agreement and are normally non-refundable. However, some
franchise agreements allow initial franchise fees to be paid over an extended period of time and
provide for the right of refund up to a certain amount.
2. Continuing Franchise Fee – These are the periodic payments made by the franchisee to the
franchisor for the ongoing franchisee support. Also referred to as Royalty Fees and are usually
based on a certain percentage of the franchisee’s sales.
3. Sale of equipment and other tangible assets – In most franchise agreements, the franchisor
provides equipment and other tangible assets to the franchisee as a separate fee.
STEP 4 : ALLOCATE THE TRANSACTION PRICE
 The transaction price is allocated to the performance obligations based on the relative stand-
alone prices of the distinct goods or services.
 The stand-alone selling price is the price at which a promised good or service can be sold
separately to a customer.
 If there is only one performance obligation in a contract, the transaction price is allocated only to
that single obligation.
STEP 4 : ALLOCATE THE TRANSACTION PRICE
 A franchisor has an initial franchise fee of Php50,000 and a 6% royalty. Separate performance
obligations have been identified for the equipment, site selection and the franchise right. Based
upon market data, the franchisor determines that site selection value is Php10,000 and the
equipment is valued at Php60,000. The franchise should be able to sustain Php500,000 of sales
annually for the 10 years of the agreement. Royalty expectations would then be Php200,000 over
the contract. The franchisor could allocate the variable consideration to the franchise right and
the up-front fee to the performance obligations for the equipment and site selection.
STEP 5 : RECOGNIZE REVENUE WHEN A
PERFORMANCE OBLIGATION IS SATISFIED
Over time – if one of the following criteria is met:
• The customer simultaneously receives and consumes the benefits provided by the entity’s
performance as an entity performs. – Example: An entity enters into a contract to provide
monthly payroll processing services to a customer for one year.
• The entity’s performance creates or enhances an asset that the customer controls as the
asset is created or enhanced.
• Entity’s performance does not create an asset with an alternative use to the entity and the
entity has an enforceable right to payment for performance completed to date. – Example:
An entity enters into a contract with a customer to provide a consulting service that results in
the entity providing a professional opinion to the customer. The professional opinion relates
to facts and circumstances that are specific to the customer. If the customer were to
terminate the consulting contract for reasons other than the entity's failure to perform as
promised, the contract requires the customer to compensate the entity for its costs incurred
plus a 15 per cent margin. The 15 per cent margin approximates the profit margin that the
entity earns from similar contracts.
At a point in time – all other performance obligations are satisfied at a point in time.
• Revenue is recognized at the point in time when the customer obtains control of the
promised asset.
Specific Principles (Licensing Section)
 If a promise to grant license is not distinct, it is then treated as a single performance obligation.
The entity will use the general principle in determining whether the performance obligation is
satisfied over time or at a point in time.
 If a promise to grant license is distinct, the entity determines whether the separate promise to
grant the license will be satisfied over time or at a point in time by determining whether the
license provides the customer with either:
1. A right to access the entity’s intellectual property as it exists throughout the license period
2. A right to use the entity’s intellectual property as it exists at the point in time at which the license
is granted.
Specific Principles (Licensing Section)
Right to Access Right to Use
The customer cannot direct the The customer can direct the
use of, and obtain all the remaining use of, and obtain all the remaining
benefits from, the license at the benefits from, the license at the
time it was granted. time it was granted.

Intellectual Property right changes Intellectual Property does not change

throughout the license period. throughout the license period.
a. the entity continues to be
involved with the IP, and
b. the entity undertakes activities
that significantly affect the IP

May be evidenced by a sales-based

royalty agreement between the
entity and the customer.
STEP 5 : RECOGNIZE REVENUE WHEN A
PERFORMANCE OBLIGATION IS SATISFIED
 A pharmaceutical company licenses to a customer its patent rights to an approved drug
compound for 10 years and also promises to manufacture the drug for the customer. The drug is a
mature product, therefore the entity will not undertake any activities to support the drug, which
is consistent to its customary business practices.
 Same scenario with the first paragraph, only that the manufacture process used to produce the
drug is not unique or specialized and several other entities can also manufacture the drug for the
customer.
END OF PRESENTATION