FOCUS NOTES ON ACCOUNTING FOR SPECIAL TRANSACTION
TENA, SHEKINAH RUTH L.
In this topic, specific provision of the standard that deals with
accounting for franchise can be found on licensing topic of
PFRS 15. The objectives of IFRS 15 is to established the
principles which an entity applies to its reports as a useful
information that arise from a contract with a customer. Its core
principle is how the entity will recognize those revenue to
depict the transfer of promised goods to customers in an
amount expected as an exchange to the goods and services.
License – establishes the customer’s rights to the
intellectual property of an entity.
(e.g software & technology, franchises, patents)
Franchise – a contractual agreement which the
franchisor grants the franchisee to acquire the rights
to sell products or services in certain location.
Franchise Fee – agreed fees between the franchisee
and franchisor
1. Contract between two private entities or individuals
- Franchisee acquires the right to utilize
franchisor’s product by signing a contract.
2. Contract between private entity or individual and the
government
- Governmental body allows a private entity to use
public property in performing services.
Under the licensing section of PFRS 15, license of Intellectual
Property must be determined first whether it is distinct or not
for specific application
For not distinct licenses, the general standard
requirements account as a single performance
obligation
For distinct licenses, the promise to grant is
considered as separate performance obligation
IFRS 15 - FRANCHISE
AA31
Standard states that entities also transfer license or intellectual
property whether at a point in time or over time and provide
customers with either:
Right to Access (Over Time) – Performance
obligation is satisfied over time and the license grant
is recognized as revenue over the license period and
can direct the use
Right to Use (At a Point in Time) – performance
obligation is satisfied at a point in time and license
grant is recognized as revenue at the time the license
is provided or when the control of the license transfers
to the customer
Transaction price is allocated to the performance
obligation based on the relative stand-alone prices of
distinct goods or services
Standard provides guidance in recognizing these royalties from
licenses of Intellectual Property and makes it as an exception.
Sale-based or Usage-based royalties is recognized only when;
Subsequent sale or usage occurs
Its performance obligation has been partially or fully
satisfied
1. Initial Franchise Fees – one-off payment which
normally occurs at the signing of franchise agreement.
2. Continuing Franchise Fee – periodic payments which
also referred as royalty fees
3. Franchisor’s Cost - overall objective is to match
related costs and revenues
4. Bargain Purchase - franchisee may purchase assets at a
lower than market price from the franchisor
5. Options to Purchase - Where the franchisor has the
right to purchase the franchisee’s business