Franchising
Franchising
Franchising
FRANCHISING = one party is giving permission to another party to use its own property
○ This property gives benefit to the parties in the long run
○ Example: Jollibee, McDo
■ Jollibee is the franchisor
■ The one using the name of Jollibee is the franchisee
Before, recognizing revenue in franchising must meet three criteria (NOT USED
ANYMORE):
Illustrative Problem 1
On January 1, 20x1, TAMISHA Co. grants a franchisee the right to operate a restaurant in a
specific location using TAMISHA’s trade name, concept and menu over a 10-year period. The
franchise agreement states an upfront fee of P1,200,000 which includes P200,000 for kitchen
equipment that TAMISHA will purchase for the franchisee, plus 10% royalty based on the
franchise’s sales. The P200,000 amount reflects the stand-alone selling price of the equipment.
TAMISHA regularly undertakes activities such as marketing research, product development,
advertising campaigns and implementing operational efficiencies and pricing strategies to
support the franchise name.
TAMISHA delivers the equipment on February 1, 20x1. The restaurant opens on April 1, 20x1,
at which date the license period starts to run. The franchisee reports sales of P900,000 for the
year.
Solution:
Step 2:
● The obligations are distinct because the customer can benefit from each promise on
their own or together with other resources that are readily available, and the franchise
license and equipment are separately identifiable.
The entity determines whether each performance obligation is satisfied over time or at a point in
time:
1. Franchise license = Franchise fee is divided over ten years.
Since the license is distinct, TAMISHA applies the specific principles whether the
franchisee has the right to access or use TAMISHA’s intellectual property. The problem
states that TAMISHA undertakes activities to support the franchise. Accordingly, the
franchisee can validly expect that its rights will change (example, rights to sell additional
products that TAMISHA will produce. Thus, since the customer has the right to access,
the performance obligation is satisfied over time.
2. Equipment = Since the control over the equipment transfers to the customer upon
delivery, the performance obligation is satisfied at a point in time.
Step 3:
Step 4: Allocation of transaction price (since there are two distinct performance obligations)
Step 5:
b. For the 1,000,000, TAMISHA applies the general principles to determine a measure of
progress that best depict its performance. Because the contract provides the franchisee
with unlimited use of the intellectual property for a fixed term (10 years), an appropriate
measure of progress may be a time-based method. TAMISHA starts to amortize the
1,000,000 on April 1 (commencement) because on this date the franchisee is able to use
and obtain the economic benefits of the license.
Entries:
Jan 1, 20x1 Cash 1,200,000
Contract Liability 1,200,000
Cash 900,000
Sales 900,000
*9,000,000 * 10%
Illustrative Problem 2
On December 1, 20x1, TALULA Co. granted a customer a franchise license to use TALULA’s
trade name and sell TALULA’s products for 5 years. The contract requires an upfront fee of
P120,000 and monthly royalty fees of 3% of sales. The upfront fee is non-refundable.
TALULA Co., as a franchisor, has developed a customary business practice to undertake the
following pre-opening/set-up activities:
a. Assistance in site selection and fitting-out the premises
b. Management and staff training
c. Advertisement and promotion
d. Preparations for, and execution of the grand opening
TALULA Co. does not provide the pre-opening/set-up activities separately from the granting of
franchise right and the franchise agreement does not state separate fees for these activities.
TALULA regularly conducts national advertising campaigns to promote the trade name.
The franchise started operations in December and as of December 31, 2021, TALULA has no
remaining obligation or intent to refund any of the cash received. All the initial services (pre-
opening activities) have been performed. The customer reported sales of P2, 000,000 in
December 20x1.
Solution:
Step 2:
Step 3:
Step 4:
Both the fixed and variable considerations are allocated to the sole performance obligation of
granting the license.
Step 5:
a. The P120,000 is recognized over the 5-year license period using the straight-line
method
Entries:
On December 1, 20x1, SIMONE Co. grants a customer a license to use SIMONE’s patented
technology over a 4-year period. The contract price is P1,000,000 payable in full at contract
inception. During December 20x1, SIMONE Co. incurs direct contract costs of P120,000 and
indirect costs of P30,000. The customer obtains control of the license on January 2, 20x2.
Solution:
Note:
● Direct cost = directly attributable to franchise (will form part of franchise cost); aligned
with recognition of revenue
○ Right to Use = satisfied at a point in time
○ Right to Access = satisfied over time
Case 1
On January 1. 20x1, NALA Co. enters into an contract with a customer to transfer a license for a
fixed fee of P100,000 payable as follows:
● 20% upon signing of contract
● Balance due in 4 equal annual installments starting December 31, 20x1. The discount
rate is 12%.
NALA incurs direct contract costs of P20,000 in 20x1. NALA transfers the license to the
customer on Jan. 3, 20x2. The license provides the customer with the right to use NALA’s
intellectual property as it exists at grant date.
Solution:
*Note: Review time value of money
1/1/x1 80,747
Profits:
20x1 20x2
Revenue - 80,747
Cost of Franchise - (20,000)
Gross Profit - 60,747
Interest Income 7,290 5,764
Indirect Costs - -
Profit for the Year 7,290 66,511
Illustrative Problem 5 (Uncertainty in Collection)
LATIFA Co. uses a standard contract for the granting of a license to customers. The standard
contains the following:
● Fixed fee of P100,000 payable as follows: P20,000 downpayment and balance due in 4
equal annual installments to start a year after the signing of contract.
● The license provides the customer the right to use LATIFA’s intellectual property as it
exists at grant date.
On January 1, 20x1, LATIFA signs three contracts. The licenses are also transferred to the
customers on this date. The discount rate is 12%. Accordingly, the present value of the note of
each contract is 60,747. LATIFA assesses the collectibility of the note from each customer and
concludes the following:
Customer 1 Probable
Customer 2 Doubtful
Customer 3 Significantly uncertain
The receivable from Customer 2 is doubtful because the region where the customer operates is
undergoing economic difficulty. However, LATIFA believes that the region’s economy will
recover in the near term and the license will help Customer 2 increase its sales. Accordingly,
LATIFA will provide Customer 2 with a price concession and estimates that it is probable that
LATIFA will collect only half of the note.LATIFA constrains its estimate of the variable
consideration and determines an adjusted transaction price of P50,373 (P20,000 downpayment
and P30,373 PV of the note). The discount rate is 12%.
Solution:
Customer 1
PV of note (given) 60,747
Downpayment 20,000
Transaction Price 80,747
Customer 3
PV of note (given) 60,747
Downpayment 20,000
Transaction Price 80,747
Note: If the customer is significantly uncertain, recognize profits only if the collection is greater
than your cost (cost recovery method).
● Cost recovery method = you are anticipating to collect profits equal to your cost. If
there is an excess between your collections and cost, that will be your profit.