What is Franchise Revenue Accounting?
Franchise revenue accounting determines when and how a franchisor recognizes the various streams of revenue from a franchise agreement: initial franchise fees, ongoing royalties, advertising contributions and product sales. Under IFRS 15, each stream is mapped to a performance obligation and recognized when control transfers.
How It Works
- Identify each distinct service the franchisor provides.
- Split the transaction price across those services based on standalone selling prices.
- Recognize the initial fee over the franchise term if linked to ongoing services.
- Recognize royalties as the underlying sales occur.
Saudi Context
Saudi-based franchisors of cafe, restaurant and retail chains expanding across the GCC apply IFRS 15 to spread initial franchise fees rather than recognizing them upfront.
Example
A SAR 200,000 initial fee paid for a 10-year franchise that includes ongoing support is typically recognized as SAR 20,000 per year over the term, not immediately.