Accounting for Franchises
Contract related intangible assets will include franchise and licensing agreements, construction permits, broadcast rights, and service or supply contracts. Below is an outline with visuals as taught by Universal CPA Review.
Franchisee Accounting – Franchise accounting is a similar concept to accounting for intangible assets, however, certain specific variables apply.
- Initial franchise fees – The present value of the amount to be paid by a franchisee is recorded as an intangible asset on the balance sheet and is to be amortized over the expected period of benefit of the franchise.
- Continuing franchise fees – Fees that are received for ongoing services provided by the franchisor to the franchisee. These costs will be expensed when incurred.
Let’s say that Maid Magic franchises its cleaning services to Oscar for an initial cost of $50,000. Within that cost includes the initial payment to use the brand and for additional training and software services. This is considered revenue to the franchisor and an intangible asset being acquired to the franchisee.
Royalties – will generally be billed by the franchisor which is generally taken as a percentage of the franchisee’s revenue earned.
Amortization – (or license) with a limited life should be amortized and expensed over the life of the franchise. If, however, the franchise has an indefinite life, it should be carried at cost and will not be amortized.
So how do we record it?
Let’s walk through an example that can frequently be seen on the CPA Exam:
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