MODULE 5: Accounting for Franchise Operations – Franchisor

1. Define a franchise contract.

Focused Listing:
 Promise to grant license if not distinct treat all promises in the contract as a single performance
obligation and general principles is use to determine whether the performance obligation is
satisfied over time or at point of time.
 Promise to grant license if distinct separated performance obligation, specific principles is use:
 Right to access – over period
 Right to use – at a point of time
 Franchise fee:
 IFF (initial) - first payment
 CFF (continuing) – monthly payment based on sales
 Contract costn(CC) include:
 Incremental costs of obtaining a contract
 Costs to fulfill a contract
 Franchisee – franchise record as intangible assets, amortized every year.
 Recognized revenue when franchise agreement
 nonrefundable
 substantial performance
 Recognized revenue (how):
 Collectability
o reasonably assured - accrual method
o not reasonably assured – GP method
o uncertain – cost recovery method
2. Apply the principles of PFRS 15 in recognizing revenue from a franchise contract.
Problem:
On January 1, 20x1, Plane Co. enters into a franchise contract with a customer to grant the right to open
a store in a specified location. The store will bear Plane Co.’s trade name and the franchisee will have the right
to sell Plane’s product for 7 years, starting on the store’s commencement of operations. The contract requires a
P1,400,000 non-refundable up-front fee and royalty of 5% of the franchisee’s subsequent sales. The upfront fee
covers the following:
a) Design for the fitting-out of the franchisee’s store to conform to Plane’s concept. The franchisee will
engage a contractor to perform the work and will pay the contractor using its own funds.
b) Training for both management and staff.
c) Signage and promotional posters and pamphlets.

The franchise contract requires Plane Co. to maintain the brand through product improvements, marketing
campaigns, research and development, and other activities that would strengthen the brand’s marketing position.

The franchisee’s new stores open on July 1, 20x1 and report sales of P9,000,000 for the year.
Requirements:
a. Apply “steps 2-5” of PFRS to identify the following:
i. The performance obligation(s) in the contract and how the performance obligation(s) are
satisfied.
o Promise to grant franchise license.
o Right to use
 ii. The transaction price and its components.
o P1, 400, 000 – IFF (fixed)
o 5% - sales from franchise (variable)
iii. The allocation of the transaction price.
o Both fixed and variable considerations are allocated to the sole performance obligation of
granting the license.
iv. The recognition of revenue from the contract.
o P1, 400, 000 recognized over 7 years license period using straight – line method.
o Sales based on royalty is recognized as the sales occur.

b. Provide all journal entries in 20x1.

January 1, 20x1
Cash P1, 400, 000
Contract Liability P1, 400, 000

July 1, 20x1
Contract Liability P100, 000
Revenue (1.4M/7*6/12) P100, 000

December 31, 20x1

Cash P450, 000
Revenue (9M*5%) P450, 000

3. Nourish your soul.

Being a CPA is never an easy job to acquire. It requires sacrifice and a lot of hard work. There is a particular
woman in our church who I look up to as a student dreaming to be a CPA. Her name is Lallaine Sumagang
and she works at our town hall as a CPA. Everyone who knew her were aware of her capabilities and how
she acquired them through obstacles.

In taking the path to be a CPA, you needed to experience trials such as battling procrastination, lacking
financially, or limiting your time with your family. As manageable as it sounds, these problems are seen by
those who had experienced as challenging. There are always temptations somewhere inside our minds luring
us away from motivation to procrastination. However, knowing how Lallaine managed to reach her goal, it
made me think that if she had done it, then maybe I could. After all, it will all be worth it when I could
finally succeed. Seeing her current situation, it motivated me to have that job that made her life smoothly
sailing ahead.

The CPA title may seem so far but if you study well and focus on the future, you might even say that it was
anything but difficult. It may be hard, but remember, it's all worth it. In order to gain something, you need to
sacrifice another thing. Believe in God and in yourself. Know that there is something inside you that is
greater than any obstacle.

4. Quiz: Diagnostic Learning Log

I learned that it is important to know the steps in revenue recognition and to know well every steps.