1. Prepared by: Gabriela H. Schneider, CMA; Grant MacEwan College INTERMEDIATE ACCOUNTING INTERMEDIATE ACCOUNTING Sixth Canadian Edition KIESO, WEYGANDT, WARFIELD, IRVINE, SILVESTER, YOUNG, WIECEK

2. C H A P T E R 6 Appendix 6A Revenue Recognition for Special Sales Transactions— Franchises

3. Learning Objectives 1.Explain revenue recognition for franchises.

4. Franchises Franchise revenue recognized from two sources: 1.Initial Franchise Fee: Sale of initial franchises and related assets or services 2.Continuing Fees: franchise operations

5. Initial Franchise Fee Recorded as revenue only when and as the franchisor has established substantial performance –The services obligated to be performed have been so performed No obligation to refund any portion of the fee received to date Substantial performance of required services –Collection of the fee is reasonably assured

6. Initial Franchise Fee - Example Initial Franchise Fee: $50,000 –Down Payment: $10,000 –Balance: 5 equal annual instalments –Discount Rate: 8% PV of $8,000 ordinary annuity = $31,942 Difference (40,000 – 31,942) = $8,058 is interest revenue to franchisor Entries if reasonable expectation of refund and significant performance by franchisee required: Cash 10,000 Notes Receivable 40,000 Discount on Note 8,058 Unearned Franchise Fees 41,942

7. Initial Franchise Fee - Example Initial Franchise Fee: $50,000 –Down Payment: $10,000 –Balance: 5 equal annual instalments –Discount Rate: 8% PV of $8,000 ordinary annuity = $31,942 Difference (40,000 – 31,942) = $8,058 is interest revenue to franchisor Entries if low expectation of refund, minimal performance by franchisee required, and collection reasonably assured: Cash 10,000 Notes Receivable 40,000 Discount on Note 8,058 Revenue from Franchise Fees 41,942

8. Initial Franchise Fee - Example Initial Franchise Fee: $50,000 –Down Payment: $10,000 –Balance: 5 equal annual instalments –Discount Rate: 8% PV of $8,000 ordinary annuity = $31,942 Difference (40,000 – 31,942) = $8,058 is interest revenue to franchisor Entries if no refund, substantial performance by franchisee required, and collection reasonably assured: Cash 10,000 Notes Receivable 40,000 Discount on Note 8,058 Revenue from Franchise Fees 10,000 Unearned Franchise Fees 31,942

9. Initial Franchise Fee - Example Entries if no refund, no performance by franchisee required, and collection highly uncertain: Cash 10,000 Revenue from Franchise Fees 10,000 Entries if down payment refundable, or substantial performance by franchisee required: Cash 10,000 Revenue from Franchise Fees 10,000

10. Continuing Franchise Fees Received from the continuing rights under the franchise agreement and provision of services by franchisor Reported as revenues when they are earned and receivable If an amount is included which is ‘ear- marked’ for a specific purpose, that amount is deferred

11. Other Franchise Fee Bargain Purchase –When the franchisee may purchase assets at a lower than market price from the franchisor –Portion of initial franchise fee is deferred Options to Purchase –Where the franchisor has the right to purchase the franchisee’s business –Initial franchise fee recorded as a liability if it is probable that a purchase will occur

12. Disclosure Full disclosure of all significant commitments and obligations is required Description of services yet to be performed is also required Initial franchise fees reported as a separate revenue line item

13. COPYRIGHT Copyright © 2002 John Wiley & Sons Canada, Ltd. All rights reserved. Reproduction or translation of this work beyond that permitted by CANCOPY (Canadian Reprography Collective) is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons Canada, Ltd. The purchaser may make back-up copies for his / her own use only and not for distribution or resale. The author and the publisher assume no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.