INTERMEDIATE

ACCOUNTING
Sixth Canadian Edition
KIESO, WEYGANDT, WARFIELD, IRVINE, SILVESTER, YOUNG, WIECEK

Prepared by:
Gabriela H. Schneider, CMA; Grant MacEwan College
 CHAPTER

6
Appendix 6A
Revenue Recognition for
Special Sales Transactions—
Franchises
 Learning Objectives

1. Explain revenue recognition for

franchises.
 Franchises

• Franchise revenue recognized from

two sources:

1. Initial Franchise Fee: Sale of initial

franchises and related assets or services
2. Continuing Fees: franchise operations
 Initial Franchise Fee
• Recorded as revenue only when and as
the franchisor has established
substantial performance
– The services obligated to be performed
have been so performed
• No obligation to refund any portion of the fee
received to date
• Substantial performance of required services
– Collection of the fee is reasonably assured
Initial Franchise Fee - Example
• Initial Franchise Fee: $50,000
– Down Payment: $10,000
– Balance: 5 equal annual instalments
– Discount Rate: 8%
• PV of $8,000 ordinary annuity = $31,942
• Difference (40,000 – 31,942) = $8,058 is interest
revenue to franchisor
• Entries if reasonable expectation of refund and significant
performance by franchisee required:
Cash 10,000
Notes Receivable 40,000
Discount on Note 8,058
Unearned Franchise Fees 41,942
Initial Franchise Fee - Example
• Initial Franchise Fee: $50,000
– Down Payment: $10,000
– Balance: 5 equal annual instalments
– Discount Rate: 8%
• PV of $8,000 ordinary annuity = $31,942
• Difference (40,000 – 31,942) = $8,058 is interest revenue to
franchisor

• Entries if low expectation of refund, minimal performance by

franchisee required, and collection reasonably assured:
Cash 10,000
Notes Receivable 40,000
Discount on Note 8,058
Revenue from Franchise Fees 41,942
Initial Franchise Fee - Example
• Initial Franchise Fee: $50,000
– Down Payment: $10,000
– Balance: 5 equal annual instalments
– Discount Rate: 8%
• PV of $8,000 ordinary annuity = $31,942
• Difference (40,000 – 31,942) = $8,058 is interest revenue to
franchisor
• Entries if no refund, substantial performance by franchisee required,
and collection reasonably assured:
Cash 10,000
Notes Receivable 40,000
Discount on Note 8,058
Revenue from Franchise Fees 10,000
Unearned Franchise Fees 31,942
Initial Franchise Fee - Example
• Entries if no refund, no performance by franchisee
required, and collection highly uncertain:

Cash 10,000
Revenue from Franchise Fees 10,000

• Entries if down payment refundable, or substantial

performance by franchisee required:

Cash 10,000
Revenue from Franchise Fees 10,000
 Continuing Franchise Fees
• Received from the continuing rights
under the franchise agreement and
provision of services by franchisor
• Reported as revenues when they are
earned and receivable
• If an amount is included which is ‘ear-
marked’ for a specific purpose, that
amount is deferred
 Other Franchise Fee
Bargain Purchase
– When the franchisee may purchase assets
at a lower than market price from the
franchisor
– Portion of initial franchise fee is deferred
Options to Purchase
– Where the franchisor has the right to
purchase the franchisee’s business
– Initial franchise fee recorded as a liability if
it is probable that a purchase will occur
 Disclosure

• Full disclosure of all significant

commitments and obligations is required
• Description of services yet to be
performed is also required
• Initial franchise fees reported as a
separate revenue line item
 COPYRIGHT
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