ACCOUNTING FOR

9 FRANCHISE OPERATIONS
- FRANCHISOR
Siomai King Franchise Sells Online
By REILOURD E. MIRANDA, CPA

The COVID-19 pandemic posed great challenges among businesses

in the Philippines. While, some businesses have closed their dine-in service,
others have shifted to online delivery services. Siomai King is among the
business establishments that, just recently, launched its franchise business
online. It offered an online franchise package for only Php.15,888, inclusive
of the following:
a. Lifetime Franchise contract, with no renewal fees, of Siomai King,
Potato King, Noodle House, Burger Factory, and Siopao da King.
b. Own online Shoplink
c. Shoplink server maintenance and Shoplink domain security
subscriptions
d. Usage of trademark and logo
e. usage of digital marketing materials
f. Basic Online Selling Training

At a very affordable transaction price, the Filipino franchisor

overcomes, even under the pressures posed by strict community quarantine,
the economic challenges of the pandemic. If you’ll do your next food supply
run, you may want to add siomai to your cart. Siomai King had made
franchising convenient more than ever. A living proof that there is an
opportunity in every challenge.

QUESTIONS
1. What are the performance obligations of the Franchisor (Siomai King)?
2. How should the franchisor allocate transaction price?
3. When should the Franchisor recognize revenue? Over time, or at a
point in time?
LEARNING OUTCOMES:
After reading this module, the learner should be able to:
1. Discuss how franchisors derive their income.
2. Journalize the different methods of accounting for initial franchise fee and the
related cost of franchise revenues – prior to substantial performance and upon
substantial performance of service.

TIME:
The time allotted for this module is FIVE (5) hours.

LEARNER DESCRIPTION
The participants in this module are Third Year BSA Students

MODULE CONTENTS:

A. FRANCHISE
A franchise agreement is the granting of business rights by the franchisor to a
franchise that will operate the franchise outlet in a specific location for a specified period
of time. An entity shall apply the principles in PFRS 15 in accordance for revenues from
FRANCHISE CONTRACTS.

Typically involves a license to use the franchisor’s intellectual property

a. Franchisor refers to main business
b. Franchisee refers to investor

B. FIVE STEP MODEL OF REVENUE RECOGNITION UNDER PFRS 15

Step 1 - IDENTIFY THE CONTRACT

a. The contract has been approved
b. The rights and payment terms can be identified
c. Contract has commercial substance
d. Consideration is PROBABLE to be received
.
STEP 2 - IDENTIFY THE PERFORMANCE OBLIGATIONS (PO)
Determine whether the performance obligations is DISTINCT or NOT DISTINCT,
then determine when the identified PO will be satisfied

i. DISTINCT - treat as “Separate Performance Obligations”

- use general principles in determining whether performance
obligation is satisfied
a. Over time
b. At a point in time

ii. NOT DISTINCT - treat as “Single Performance Obligations”

- Use specific principles to determine whether the promise provides
the customer a:
 a. Right to Access - revenue is recognized over time
b. Right to Use - revenue is recognized at a point in time

RIGHT OF ACCESS RIGHT TO USE

The customer CANNOT direct the use of, The customer CAN direct the use of, and
and obtain substantially all of the remaining obtain substantially all of the remaining
benefits from, the license at the point in time benefits from, the license at the point in
at which the license is granted time at which the license is granted

Intellectual property (IP) changes Intellectual property (IP) 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 evidence by a sales-based royalty

STEP 3 - DETERMINE THE TRANSACTION PRICE

Transaction price refers to the amount of consideration the entity expects to be
entitled in exchange for franchise services, excluding amounts collected on behalf of third
parties. It is usually referred to as franchise fees

FRANCHISORS SOURCES OF REVENUE

1. INITIAL FRANCHISE FEE
Payment for establishing the relationship and providing some initial
services, equipment, etc. Franchisor’s Usual Initial Services for the Franchisee
includes:

a. Assistance in site selection

1. Analysing location
2. Negotiating lease
b. Evaluation of potential income
c. Supervision of construction activity
1. Obtaining financing
2. Designing building
3. Supervising contractor while building
d. Assistance in the acquisition of signs, fixtures and equipment
e. Provision of bookkeeping and advisory services
1. Setting up franchisee’s records
2. Advising on income, real estate and other taxes
3. Advising on local regulations of the franchisee’s business
f. Provision of employee and management training
g. Provision of quality control
2. CONTINUING FRANCHISE FEES/ ROYALTIES
o Periodic payment In return for continuing rights granted by the
agreement.
o Also referred to as royalty fees. Royalty fee should be reported as
revenue when they are earned over time and receivable from the
franchisee, unless a portion of them has been designated for a particular
purpose
o For providing management training, advertising and promotion, legal
assistance, and other support.

May be calculated using the following formula

a. Straight payments based on percentage of sales (i.e. 1% of sales;
7% of sales)
b. Flat fee payments on a weekly or monthly basis (i.e. 2,500 every
week; 10,000 every month).
c. Mark-up on products or services provided (i.e. 10% of unit selling
price for every unit sold)

3. SELLING OF EQUIPMENT AND OTHER TANGIBLE ASSETS

a. In most franchise agreements, the franchisor provides equipment
and other tangible assets to the franchisee for a SEPARATE FEE
b. The franchisor may purchase goods centrally and supplies directly
to franchisees. A mark-up, purchasing, or handling fee may be
charged on tangible assets transferred to franchisees.

STEP 4 - ALLOCATE THE TRANSACTION PRICE TO THE PERFORMANCE

OBLIGATIONS
o Transaction price is the 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, e.g. VAT (IFRS 15.47).
o Transaction price determined in STEP 3 will be allocated based on their relative
stand-alone selling price. Standalone selling price is the price at which the
promised goods or service can be sold separately to a customer.
o Transaction price will be allocated only to single performance obligation when
there is only one Performance obligation.
o Transaction price is determined after taking into account the impact of the
following (IFRS 15.48):
a. variable consideration
b. The existence of a significant financing component in the contract,
c. non-cash consideration,
d. Consideration payable to a customer.

o When determining the transaction price, entities should assume that the goods or
services will be transferred to the customer as promised in the existing contract
and that the contract will not be cancelled, renewed or modified (IFRS 15.49).
STEP 5 - RECOGNIZE REVENUE WHEN (OR AS) PERFORMANCE OBLIGATIONS
ARE SATISFIED

RECOGNITION OF FRANCHISE REVENUE

Recognition of revenue depends upon the different performance of obligations of
the franchisor. Performance obligations must be identified separately and then
distinguished if the revenue related to it is to be recognized over time or at a point in time

a. RECOGNITION OVER TIME

• Revenue is recognized over the period of the continuing performance
obligation
• When control of the franchise right has not been transferred to the
franchisee but rather the continuing access to the right is provided by the
franchisor

b. RECOGNITION AT A POINT IN TIME

• Revenue is recognized when the performance obligation is satisfied
• When control of the franchise rights is transferred to the franchisee

REVENUES IFRS 15 (OVER TIME)

Initial Franchise Fee (IFF) *REQUISITES

1. Satisfaction of performance obligation
2. Transfer of control over the operations of the
franchisee

Continuing Franchise Fee (CFF) *REQUISITES

1. Satisfaction of performance obligation
2. Sale already occurred

Sale of equipment and other At point of sale or when control over the asset is
tangible assets. transferred to franchisee.

Interest Revenue (Part of the Interest shall be amortized, in “piecemeal function”

Total Franchise Fee Revenue). using Effective Interest Method (under PAS 18)

Recognized based on passage of time.

NOTE:

Initial Franchise Fee XX

Continuing Franchise Fee XX

Revenue from sale of equipment and other tangible assets XX

 Total Franchise Fee Revenue XX

Interest Income XX

Total Franchise Revenue XX

How are Out-of pocket-costs related to IFF and CFF treated?

FRANCHISE COSTS DIRECT COST INDIRECT

COST

Initial Franchise Fee (IFF) Capitalized (matched with Expense

revenue)

Continuing Franchise Fee EXPENSED Expensed

(CFF)

ACCRUAL METHOD
If a note receivable is received revenue is only recognized when the collectability
of the note is reasonably assured

Cash (for down payment if non-refundable) XX

(+) Notes Receivable (for Balance) XX

(-) Direct Cost - Initial Service (XX)

GROSS PROFIT XX

(+) Continuing Franchise Fee XX

(+) Income from sale of equipment and other tangible assets XX

(+) Interest Income XX

TOTAL FRANCHISE REVENUE XX

(-) Indirect Cost - Initial Service (XX)

(-) Direct cost of Continuing Service (XX)

(-) Indirect Cost of Continuing Service (XX)

NET INCOME/ (LOSS) OF FRANCHISOR XX/ (XX)

ONLINE READING MATERIALS:
• Read the complete details of PFRS 15 at
https://www.iasplus.com/en/standards/ifrs/ifrs15
• Read Chapter 11 of Advanced Accounting by Antonio Dayag

ONLINE VIDEO LINKS AND MATERIALS:

• Watch the online video lecture of the course instructor uploaded at NEO LMS
and to the class shared Google drive (if applicable).

TEST YOUR KNOWLEDGE:

Refer to Ubian LMS for the Activity and Quiz

LESSON REFERENCES:
Dayag, Antonio J. (2020), Advanced Financial Accounting (A Comprehensive:
Conceptual & Procedural Approach) Good Dreams Publishing. Sampaloc, Manila

Deloitte (2020). IFRS 15 — Revenue from Contracts with Customers. IASPlus.com.

Retrieved from https://www.iasplus.com/en/standards/ifrs/ifrs15

Millan, Zeus Vernon B. (2020). Accounting for Special Transactions. Bandolin Enterprise.
#21 Paramount Vill., Sto. Tomas, Baguio City