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Franchise Fee - Accounting Requirements

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Franchise Fee - Accounting Requirements

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What accounting requirements exist?

o Unearned franchise fees are recorded at present value. Where a part of the initial fee constitutes a nonrefundable amount for services already performed, revenue should be accordingly recognized.
o The initial franchise fee is not typically allocated to specific franchisor services before all services are performed. This practice can only be done if actual transaction prices are available for individual services.
o If the franchisor sells equipment and inventory to the franchisee at no profit, a receivable and payable is recorded. No revenue or expense recognition is given.
o In the case of a repossessed franchise, refunded amounts to the franchisee reduce current revenue. If there is no refund, the franchisor books additional revenue for the consideration retained which was not previously recorded. In either situation, prospective accounting treatment is given for the repossession.
o Indirect costs of an operating and recurring nature are expensed immediately. Future costs to be incurred are accrued no later than the period in which related revenue is recognized. Bad debts applicable to expected uncollectability of franchise fees should be recorded in the year of revenue recognition.
o Installment or cost recovery accounting may be employed to account for franchisee fee revenue only if a long collection period is involved and future uncollectability of receivables cannot be accurately predicted.

Footnote disclosure is required of:
o Outstanding obligations under agreement.
o Segregation of franchise fee revenue between initial and continuing.

Note that these costs are not to be netted as a reduction of cost.

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Return to CPA Review.

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