How are franchise fees allocated across performance obligations under IFRS 15?

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AcadiFi · Accepted Answer

Under IFRS 15, a franchisor must identify each distinct performance obligation in the franchise agreement and allocate the total transaction price across them based on...

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**Common Performance Obligations in Franchise Agreements:**

1. **Franchise license (brand/IP)** -- Right to use the brand, systems, and know-how
2. **Initial training** -- Pre-opening staff training programs
3. **Equipment/supplies** -- Specialized fixtures, POS systems, initial inventory
4. **Ongoing support** -- Marketing, operational updates, quality assurance

**Worked Example -- Kova Coffee Roasters (fictional)**

Kova charges a $150,000 upfront franchise fee and 5% ongoing royalty on gross sales. The agreement includes brand license (10-year term), 2-week barista training, and espresso equipment.

| Obligation | Standalone Selling Price | Allocation % | Allocated Fee |
|---|---|---|---|
| Brand license (10 years) | $200,000 | 66.7% | $100,000 |
| Initial training | $30,000 | 10.0% | $15,000 |
| Equipment package | $70,000 | 23.3% | $35,000 |
| **Total** | **$300,000** | **100%** | **$150,000** |

**Revenue Recognition Timing:**

- **Equipment**: At point in time -- when control transfers (delivery and installation)
- **Training**: Over time -- as training sessions are delivered (2 weeks)
- **Brand license**: Depends on nature. If it's a **right to access** (franchisor continues to support and develop the brand), recognize over the 10-year license term. If it's a **right to use** (static IP with no ongoing support), recognize at a point in time.

Most franchise licenses are "right to access" because franchisors actively maintain and develop brand value, meaning the $100,000 is recognized ratably over 10 years ($10,000/year).

The 5% ongoing royalty is recognized as the franchisee generates sales under the sales-based royalty exception in IFRS 15, which allows recognition as the underlying sale occurs.

How are franchise fees allocated across performance obligations under IFRS 15?

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