Franchise Accounting Overview

What is a franchise defined as in the context of accounting?

Which of the following is classified as a non-distinct performance obligation?

What is considered the transaction price (TP) in franchise accounting?

How are non-refundable upfront fees recorded in franchise accounting?

What type of intellectual property can be licensed in a franchise?

Which component must be evaluated to determine if a significant financial component exists in a franchise arrangement?

What does the term 'distinct' refer to in the context of performance obligations?

If a franchisor provides training services as part of the franchise agreement, how should this be classified?

Franchise Accounting: Overview

A franchise establishes a customer's rights to an entity's intellectual property (IP).
Examples of IP licenses include software, technology, franchises, and patents.

Step 1: Identifying the Contract

The franchise agreement is the contract between the franchisor and franchisee.
The agreement grants the franchisee rights to sell the franchisor's products.

Step 2: Identifying Performance Obligations

Determine if performance obligations are distinct or not distinct.
Distinct obligations have separate utility and are separately identifiable.
Examples of performance obligations include rights to use a brand, equipment, products, and services (startup, training).

Step 3: Determining the Transaction Price

The transaction price (TP) is the consideration for establishing the franchise relationship and initial services.
TP includes non-refundable upfront fees (initial franchise fee).
TP is allocated to performance obligations.
Non-refundable upfront fees are recorded as unearned revenue until performance obligations are satisfied.
If a significant financial component exists, use present value (PV) for TP (excluding interest).
Interest is recorded as unearned interest income.

This quiz covers the fundamentals of franchise accounting, focusing on the franchise agreement, performance obligations, and transaction pricing. Understand the roles of franchisors and franchisees as well as the importance of intellectual property in franchise operations.