Accounting Rules for Franchisors


Franchisors are companies that own a particular business concept they allow others -- franchisees -- to buy into. A successful franchisor such as McDonald's can receive revenue from thousands of franchisees across the country or even the world. The Financial Accounting Standards Board sets the rules for how franchisors must account for their income from franchisees.


Financial Accounting Standard 45 states the franchisor can record the income from a franchise sale when she's completed all material services and conditions related to the sale. That means the franchisor has carried out all initial services required under the franchise contract, and that she has no remaining obligation or intent to refund any payments received from the franchisee. If the agreement doesn't require any initial services, but the company provides them as a standard practice, she must provide them to claim revenue.


The FASB assumes, in most cases, a franchisor has completed the initial services required when the franchisee actually opens its doors. At that point, the franchisor can include the revenue on his books. Any costs the franchisor occurs in completing the sale should be deferred until then. If the initial franchise fee is large and the franchisees' continuing fees are not, the franchisor may have to amortize the initial fee over the life of the franchise, claiming a portion as income in each year the franchise stays open.

Continuing Fees

The franchisor can treat continuing fees as revenue as soon as he's entitled to receive them from the franchisee. Even if part of the fee is for a particular purpose -- a national ad campaign that's already launched, for instance -- it isn't revenue until it's time for the franchisee to pay. The franchisor should record any expenses involved in earning the continuing fees at the time he incurs the cost.


If a franchisor provides material goods to a beginning franchisee -- such as signs, equipment or inventory -- the franchisor can claim that part of the franchise fee immediately. The amount must be based on the fair market value of the material goods. If the franchisee is entitled to buy equipment or supplies at below the market rate, then part of the initial fee shall be deferred to cover the difference between market value and the purchase price.

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