LESSON 10 FRANCHISE (3 HOURS)
PFRS 15 Revenue from Contracts with Customers
• An entity shall apply the principles set forth under PFRS 15 Revenue from
Contracts with Customers in accounting for revenues from contracts with
customers, regardless of the nature of the contract entered into with a
customer.
• An entity recognizes revenue to depict the transfer of promised goods or
services to customers in an amount that reflects the consideration to which the
entity expects to be entitled in exchange for those goods or services.
Step 1: Identify the contract with the customer
Requirements before a contract with a customer is accounted for under PFRS
15:
1. The contract must be approved and the contracting parties
are committed to it;
2. rights and payment terms are identifiable;
3. The contract has commercial substance; and
4. The consideration is probable of collection.
No revenue is recognized if the contract does not meet the criteria above. Any
consideration received is recognized as liability.
Step 2: Identify the performance obligations in the contract
Each promise in a contract to transfer a distinct good or service is treated as a
separate performance obligation.
Identifying distinct goods or services
A good or service is distinct if:
(a) the customer can benefit from it, either on its own or together with other
resources that are readily available to the customer (e.g., the good or service
is regularly sold separately); and
(b) the good or service is separately identifiable (i.e., not an input to a
combined output, does not significantly modify the other promises, or not
highly interrelated with the other promises).
A good or service that is not distinct shall be combined with the other
promises in the contract. Combined promises are treated as a single
performance obligation.
Specific principles
Promise to grant license is:
Not distinct Distinct
Ø treat all promises in the contract as a Ø Treat the promise to grant the license as
single performance obligation. a separate performance obligation.
Ø Use general principles to determine Ø Use specific principles to determine if
whether the performance obligation is the promise provides the customer a:
satisfied over time or a point in time.
a. Right to access- performance
obligation is satisfied over time. Revenue
is recognized over the license period.
b. Right to use- performance obligation
is satisfied at a point in time. Revenue is
recognized at the time when the license is
provided.
Right to grant is distinct:
Right to access Right to use
Ø The customer cannot direct the use of, Ø The customer can direct the use of, and
and obtain substantially all of the obtain substantially all of the remaining
remaining benefits from, the license at the benefits from, the license at the point in
point in time at which the license is time at which the license is granted.
granted.
Ø Intellectual Property (IP) changes Ø Intellectual property (IP) does not
throughout the license period. change throughout the license period.
a. The entity continues to be involved
with the IP: and
b. The entity undertakes activities that
significantly affect the IP.
Ø Maybe evidenced by a sales-based Ø
royalty agreement between the entity and
the customer
Specific principles – continuation
• Regardless of the previous requirements (i.e., not distinct vs. distinct, right
to access vs. right to use), an entity shall recognize revenue from sales-based
or usage-based royalties when (or as) those sales or usage occur.
Step 3: Determine the transaction price
• The entity shall determine the transaction price because this is the
amount at which revenue will be measured.
• Transaction price is “the amount of consideration to which an entity
expects to be entitled in exchange for transferring promised goods or services
to a customer, excluding amounts collected on behalf of third parties (e.g.,
some sales taxes).” The consideration may include fixed amounts, variable
amounts, or both.
Step 4: Allocate the transaction price to the performance obligations
• The transaction price shall be allocated to each performance obligation
identified in a contract based on the relative stand-alone prices of the
distinct goods or services promised to be transferred.
• The stand-alone selling price is the price at which a promised good or
service can be sold separately to a customer.
Step 5: Recognize revenue when (or as) the entity satisfies a performance
obligation
• If the performance obligation in the contract is satisfied over time,
revenue is recognized over time as the entity progresses towards the complete
satisfaction of the obligation.
• If the performance obligation in the contract is satisfied at a point in
time, the entity recognizes revenue when the performance obligation is
satisfied.
• Revenue is measured at the amount of the transaction price allocated to
the satisfied performance obligation.
Measuring progress towards complete satisfaction of a performance
obligation
• For each performance obligation satisfied over time, an entity shall
recognize revenue over time by measuring the progress towards complete
satisfaction of that performance obligation.
• Examples of acceptable measurement methods:
1. Output methods (e.g., surveys of work performed)
2. Input methods (e.g., relationship between costs incurred to date and
total expected costs)
If efforts or inputs are expended evenly throughout the performance period,
revenue may be recognized on a straight-line basis.
Contract costs
Contract costs include the following:
(a) Incremental costs of obtaining a contract – recognized as asset if they are
recoverable and avoidable. As a practical expedient, the costs are recognized
as expense if their expected amortization period is 1 year or less.
(b) Costs to fulfill a contract –if within the scope of PFRS 15, they are
recognized as asset if they are: (a) directly related to a contract, (b) generate or
enhance resources, and (c) recoverable.
Presentation
A contract where either party has performed is presented in the statement of
financial position as a contract liability, contract asset or receivable.
• Contract liability – is an entity’s obligation to transfer goods or services
to a customer for which the entity has received consideration (or the amount is
due) from the customer.
• Contract asset – is an entity’s right to consideration in exchange for
goods or services that the entity has transferred to a customer when that right
is conditioned on something other than the passage of time.
• Receivable – is an entity’s right to consideration that is unconditional.
• Non-refundable upfront fee (i.e., initial franchise fee that covers the
provision of the ‘know-how’ and initial services to set up the contract) is a
performance obligation only if it relates to the transfer of goods or services. It
is not a performance obligation if it relates to administrative tasks to set up a
contract. In the latter case, the non-refundable upfront fee is treated as a
prepayment and recognized as revenue only when the related goods or
services are transferred to the customer.
• If the timing of agreed payments provides the customer or the entity with
a significant benefit of financing, the revenue recognized shall reflect
the cash selling price of the goods or services.
REVIEW PROBLEMS
PROBLEM 1: On January 1, 2014 Kamazaqui co., granted franchise to KDG. The
initial franchise fee agreed wasP1,000,000. A P100,000 down payment was
received upon signing the contract and a 12% Note receivable for the balance
payable in three equal annual installments starting December
2,[Link] received represents a fair measure of the services
already rendered by Kamazaqui and is nonrefundable notwithstanding lack of
substantial performance by Kamazaqui. Aggregate cost of the franchise
amounted to P650, 000.00. KDG commenced operation on July 2,2014.
Deferred Franchise fee
deferred franchise fee 0
Franchise Fee recognized in the current year
total recognized revenue from franchise fee 1,000,000
Net Income for the current year
Revenue from franchise fee 1,000,000
Cost of the services (650,000)
Operating Income 350,000
Other income: interest income 99,000
NET INCOME P449,000
The down payment represents a fair measure of the services already
performed so it is recognized as revenue earned.
Commencement of operations is assumed to be the earliest point to which
substantial performance has been performed, unless it can be demonstrated
that substantial performance of all obligations has oc-curred before that time.
The problem is silent so the collectability of the note is assumed to be
reasonably assured.
On February 2, 2014, [Link] owner of GGV Co. granted J. Martinez a right
to sell GGV products.
Total Initial Franchise fee agreed wasP1, 000, 000.00.P200, 000.00 is paid in
cash in January and the bal-ance is payable in 4 equal annual installments
evidenced by a note receivable.
Payments starts on December [Link] note is likely to be collected and 14%
is the implicit rate for a loan like this.
[Link] is also entitled to 2% of J. Martinez’s profit in excess of P200,
000.00.
[Link] has P900,000.00 in operating profit after commencing in March
31,[Link] aggregate cost incurred by [Link] was P550,000.00.
Ø What is the adjusted sales value of the franchise?
PV of note rec (2.9137 x 200,000) 582,740
Down payment 200,000
Adjusted sales value 782,740
TEACHER’S INSIGHT
· PFRS 15 requires an entity to apply some specific principles when determining
whether a promise to transfer a license is satisfied over time or at a point in time.
· If the performance obligation in a franchise contract is satisfied over time,
revenue is recognized over the duration of the franchise contract as the performance
obligation is satisfied. The entity shall determine an appropriate method of
measurement of its progress towards the complete satisfaction of the performance
obligation.
· If the performance obligation in a franchise contract is satisfied at a point in time,
revenue is recognized when the performance obligation is satisfied.
· Revenue from sales-based or usage-based royalties is recognized when those
sales or usage occur.