Chapter 8 Accounting for Franchise

Operations – Franchisor
Related standard: PFRS 15 Revenue from Contracts
with Customers

Learning Competencies
• Define a franchise contract.
• Apply the general and specific principles of
PFRS 15 in recognizing revenue from franchise
contracts.

ACCOUNTING FOR SPECIAL TRANSACTIONS (Advanced Accounting 1) - (by:

MILLAN)
 Applicability of PFRS 15

• An entity shall apply the principles set forth under PFRS

15 Revenue from Contracts with Customers in
accounting for revenues from contracts with customers,
regardless of the nature of the contract entered into with
a customer.

ACCOUNTING FOR SPECIAL TRANSACTIONS (Advanced Accounting 1) - (by:

MILLAN)
 Core principle

• An entity recognizes revenue to depict the

transfer of promised goods or services to
customers in an amount that reflects the
consideration to which the entity expects to be
entitled in exchange for those goods or services.

ACCOUNTING FOR SPECIAL TRANSACTIONS (Advanced Accounting 1) - (by:

MILLAN)
 Steps in the recognition of revenue

PFRS 15 requires the following steps in recognizing revenue:

• Step 1: Identify the contract with the customer
• Step 2: Identify the performance obligations in the contract
• Step 3: Determine the transaction price
• Step 4: Allocate the transaction price to the performance
obligations in the contract
• Step 5: Recognize revenue when (or as) the entity satisfies a
performance obligation
 

ACCOUNTING FOR SPECIAL TRANSACTIONS (Advanced Accounting 1) - (by:

MILLAN)
 Step 1: Identify the contract with the customer

Requirements before a contract with a customer is accounted for under

PFRS 15:
a. The contract must be approved and the contracting parties are
committed to it;
b. rights and payment terms are identifiable;
c. The contract has commercial substance; and
d. The consideration is probable of collection.

No revenue is recognized if the contract does not meet the criteria

above. Any consideration received is recognized as liability.

ACCOUNTING FOR SPECIAL TRANSACTIONS (Advanced Accounting 1) - (by:

MILLAN)
 Step 2: Identify the performance obligations in the contract

Each promise in a contract to transfer a distinct

good or service is treated as a separate
performance obligation.

ACCOUNTING FOR SPECIAL TRANSACTIONS (Advanced Accounting 1) - (by:

MILLAN)
 Identifying distinct goods or services
A good or service is distinct if:
(a) the customer can benefit from it, either on its own or together
with other resources that are readily available to the customer
(e.g., the good or service is regularly sold separately); and
(b) the good or service is separately identifiable (i.e., not an input
to a combined output, does not significantly modify the other
promises, or not highly interrelated with the other promises).

A good or service that is not distinct shall be combined with the other
promises in the contract. Combined promises are treated as a single
performance obligation.

ACCOUNTING FOR SPECIAL TRANSACTIONS (Advanced Accounting 1) - (by:

MILLAN)
 Specific principles

ACCOUNTING FOR SPECIAL TRANSACTIONS (Advanced Accounting 1) - (by:

MILLAN)
 Specific principles - continuation

ACCOUNTING FOR SPECIAL TRANSACTIONS (Advanced Accounting 1) - (by:

MILLAN)
 Specific principles - continuation
• Regardless of the previous requirements (i.e., not distinct vs.
distinct, right to access vs. right to use), an entity shall recognize
revenue from sales-based or usage-based royalties when (or as)
those sales or usage occur.

ACCOUNTING FOR SPECIAL TRANSACTIONS (Advanced Accounting 1) - (by:

MILLAN)
 Step 3: Determine the transaction price

• The entity shall determine the transaction price because this is

the amount at which revenue will be measured.

• 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., some sales taxes).” The consideration
may include fixed amounts, variable amounts, or both.

ACCOUNTING FOR SPECIAL TRANSACTIONS (Advanced Accounting 1) - (by:

MILLAN)
 Step 4: Allocate the transaction price to the performance obligations

• The transaction price shall be allocated to each performance

obligation identified in a contract based on the relative stand-
alone prices of the distinct goods or services promised to be
transferred.

• The stand-alone selling price is the price at which a promised good

or service can be sold separately to a customer.

ACCOUNTING FOR SPECIAL TRANSACTIONS (Advanced Accounting 1) - (by:

MILLAN)
 Step 5: Recognize revenue when (or as) the entity satisfies a
performance obligation

• If the performance obligation in the contract is satisfied over

time, revenue is recognized over time as the entity progresses
towards the complete satisfaction of the obligation.  
• If the performance obligation in the contract is satisfied at a
point in time, the entity recognizes revenue when the
performance obligation is satisfied.
• Revenue is measured at the amount of the transaction price
allocated to the satisfied performance obligation.

ACCOUNTING FOR SPECIAL TRANSACTIONS (Advanced Accounting 1) - (by:

MILLAN)
 Measuring progress towards complete satisfaction of a performance
obligation

• For each performance obligation satisfied over time, an entity shall

recognize revenue over time by measuring the progress towards
complete satisfaction of that performance obligation.
• Examples of acceptable measurement methods:
1. Output methods (e.g., surveys of work performed)
2. Input methods (e.g., relationship between costs incurred to date
and total expected costs)

If efforts or inputs are expended evenly throughout the performance

period, revenue may be recognized on a straight-line basis.
ACCOUNTING FOR SPECIAL TRANSACTIONS (Advanced Accounting 1) - (by:
MILLAN)
 Contract costs

Contract costs include the following:

(a) Incremental costs of obtaining a contract – recognized as asset if
they are recoverable and avoidable. As a practical expedient, the
costs are recognized as expense if their expected amortization
period is 1 year or less.
(b) Costs to fulfill a contract –if within the scope of PFRS 15, they are
recognized as asset if they are: (a) directly related to a contract, (b)
generate or enhance resources, and (c) recoverable.

(OPTIONAL APPLICATION: PROBLEM 38-6: # 9)

ACCOUNTING FOR SPECIAL TRANSACTIONS (Advanced Accounting 1) - (by:

MILLAN)
 Presentation
A contract where either party has performed is presented in the statement
of financial position as a contract liability, contract asset or receivable.
• Contract liability – is an entity’s obligation to transfer goods or
services to a customer for which the entity has received consideration (or
the amount is due) from the customer.
• Contract asset – is an entity’s right to consideration in exchange for
goods or services that the entity has transferred to a customer when that
right is conditioned on something other than the passage of time.
• Receivable – is an entity’s right to consideration that is unconditional.

ACCOUNTING FOR SPECIAL TRANSACTIONS (Advanced Accounting 1) - (by:

MILLAN)
 ADDITIONAL CONCEPTS
Concepts related to Step 2 (Identifying the performance
obligations)

• Non-refundable upfront fee (i.e., initial franchise fee that covers

the provision of the ‘know-how’ and initial services to set up the
contract) is a performance obligation only if it relates to the transfer of
goods or services. It is not a performance obligation if it relates to
administrative tasks to set up a contract. In the latter case, the non-
refundable upfront fee is treated as a prepayment and recognized as
revenue only when the related goods or services are transferred to the
customer.
ACCOUNTING FOR SPECIAL TRANSACTIONS (Advanced Accounting 1) - (by:
MILLAN)
ADDITIONAL CONCEPTS
Concepts related to Step 3 (Determining the transaction
price) - continuation
• If the timing of agreed payments provides the customer or the entity
with a significant benefit of financing, the revenue recognized
shall reflect the cash selling price of the goods or services.

ACCOUNTING FOR SPECIAL

TRANSACTIONS (Advanced
Accounting 1) - (by: MILLAN)
 APPLICATION OF CONCEPTS
 

ANSWER PRACTICE SET # 8

ACCOUNTING FOR SPECIAL TRANSACTIONS (Advanced Accounting 1) - (by:

MILLAN)
 OPEN FORUM
QUESTIONS????
REACTIONS!!!!!

ACCOUNTING FOR SPECIAL TRANSACTIONS (Advanced Accounting 1) - (by:

MILLAN)
 END
ACCOUNTING FOR SPECIAL TRANSACTIONS (Advanced Accounting 1) - (by:
MILLAN)