How To Recognize Franchise Fee As Revenue

Franchise fees may cover the supply of initial and subsequent services,equipment and other tangible assets,and know-how 

Extracted from the appendix to Malaysia FRS 118 revenue,the following are noted in the event we need to recognize revenue from the varying aspect of franchising: 

Supplies of equipment and other tangible assets.

• The amount,based on the fair value of the assets sold,is recognized as revenue when the items are delivered or title passes. 

Supplies of initial and subsequent services.

Fees for the provision of continuing services,whether part of the initial fee or a separate fee,are recognized as revenue as the services are rendered.

• When the separate fee does not cover the cost of continuing services together with a reasonable profit,part of the initial fee,sufficient to cover the costs of continuing services and to provide a reasonable profit on those services,is deferred and recognized as revenue as the services are rendered.
• The franchise agreement may provide for the franchisor to supply equipment,inventories,or other tangible assets,at a price lower than that charged to others or a price that does not provide a reasonable profit on those sales. In these circumstances,part of the initial fee,sufficient to cover estimated costs in excess of that price and to provide a reasonable profit on those sales,is deferred and recognized over the period the goods are likely to be sold to the franchisee. The balance of an initial fee is recognized as revenue when performance of all the initial services and other obligations required of the franchisor (such as assistance with site selection,staff training,financing and advertising) has been substantially accomplished.
• The initial services and other obligations under an area franchise agreement may depend on the number of individual outlets established in the area. In this case,the fees attributable to the initial services are recognized as revenue in proportion to the number of outlets for which the initial services have been substantially completed.

• If the initial fee is collectible over an extended period and there is a significant uncertainty that it will be collected in full,the fee is recognized as cash installments are received.

Continuing franchise fees.

• Fees charged for the use of continuing rights granted by the agreement,or for other services provided during the period of the agreement,are recognised as revenue as the services are provided or the rights used.

Agency transactions.

• Transactions may take place between the franchisor and the franchisee which,in substance,involve the franchisor acting as agent for the franchisee. For example,the franchisor may order supplies and arrange for their delivery to the franchisee at no profit. Such transactions do not give rise to revenue.

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