This video shows how to account for franchise fees from the perspective of the franchisor. The key is to understand the component of the initial franchise fee that is associated with services the franchisor has agreed to perform (e.g., training the franchisee’s employees). This portion of the franchise revenue is booked as unearned revenue and is not recognized until the services have been performed. The portion of the initial franchise fee that is not linked to the performance of services, however, can be recognized as revenue upfront. Future royalties from the franchisee are recognized by the franchisor per typical revenue recognition rules.
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