Accounting for Franchises

Question 1

What is initial franchise fees and what’s involved?

Answer 1

• Paid by franchisee for receiving initial services from the franchisor
• Revenue by franchisor when “ substantially performed”

Question 2

What is continuing franchise fees and what’s involved?

Answer 2

• received for ongoing services

- calculated based on a percentage of franchise revenues

Question 3

What does ‘substantial performance’ mean?

Answer 3

1. Franchisor has no obligation to refund any payment received
2. Initial services required of the franchisor have been performed
3. All other conditions of the sale have been met

Question 4

How is initial franchise fees accounted for franchisee?

Answer 4

The PV of the amount paid by a franchisee is recorded as an intangible asset on the balance sheet and amortized over the expected period of benefit of the franchise

Question 5

How is continuing franchise fees accounted for franchisee?

Answer 5

Fees should be reported by the franchisee as an expense and as revenue by the franchisor, in the period incurred