Wiley GAAP 2008

Concepts and Rules

Franchise Sales

Franchise operations are generally subject to the same accounting principles as other commercial enterprises. Special issues arise out of franchise agreements, however, which require the application of special accounting rules.

Revenue is recognized, with an appropriate provision for bad debts, when the franchisor has substantially performed all material services or conditions. Only when revenue is collected over an extended period of time and collectibility cannot be predicted in advance would the use of the cost recovery or installment methods of revenue recognition be appropriate. Substantial performance means

1. The franchisor has no remaining obligation to either refund cash or forgive any unpaid balance due.

2. Substantially all initial services required by the agreement have been performed.

3. No material obligations or conditions remain.

Even if the contract does not require initial services, the pattern of performance by the franchisor in other franchise sales will impact the time period of revenue recognition. This can delay such recognition until services are either performed or it can reasonably be assured they will not be performed. The franchisee operations will be considered as started when such substantial performance has occurred.

If initial franchise fees are large compared to services rendered and continuing franchise fees are small compared to services to be rendered, then a portion of the initial fee is deferred in an amount sufficient ...