Franchise contracts as intangible assets

The PGC defines the intangible assets as the non-monetary asset of the company without physical appearance, but that has an economic and monetary valuation. Thus, we can find administrative concessions, goodwill, the right of transfer which we have already had the opportunity to analyze in our blog, computer applications, etc. Another accounting aspect that we can find included within this asset element of the company is the franchise agreement. Let's look at your setup from an accounting aspect.

What does a franchise agreement consist of?

Firstly, from a legal point of view, we can define the franchise contract as that legal transaction between two parties by which the franchisor grants the franchisee a right of use and enjoyment on their own specific business, in exchange for a fee that will be delivered by the franchisee to the franchisor.

This right of use and enjoyment may include, depending on the contract and agreed agreement, the brand, the product and/or service itself, advertising, technical and commercial support, employee training, promotions, offers, etc. thus getting the franchisee to start a business already forged through his own know-how and business advancement of the franchisor itself. The most characteristic examples are Mango, Burger King, Starbucks,…

Thus, and in relation to the accounting regulations, we can highlight the sixth rule, section 7, of the ICAC Resolution on intangible assets and which regulates the franchise contract in which the franchisor transfers the use and enjoyment in exchange for a consideration.

It may also happen that the delivery of a series of annual payments depending on the economic result obtained in the franchised company itself.

What does a transfer consist of?

On the other hand, we must keep in mind whether we are from the point of view of the franchisee or the franchisor:

1. From the franchisee's point of view: The initial fee must be registered in account 20X, "Franchise Rights", and must comply with the requirements established in the PGC for intangible assets (notably the Resolution of May 28, 2013, of the Institute of Accounting and Auditing of Accounts and consultation number 4 of BOICAC number 99/ September 2014).

If annual payments are to be made based on the profits obtained, they will be considered a lease and will be an expense for the year, and must be recorded in account 621, "Leases and royalties."

In relation to amortization, we must take into account the maximum term of the contract, with its possible extensions, which will be the maximum term to be able to practice it since it will be the period in which the benefits are expected to be produced.

• From the franchisor's point of view: The income obtained from payments made based on the profits obtained by the franchisee may be recorded in account 75, "Other management income." However, the PGC does not establish any specific account for this purpose.

Example:

A newly established company negotiates a franchise contract with Starbucks, by which it supplies the product, personnel training, advertising, etc. The franchise contract carries a fee of 65,000 euros plus VAT and a duration of 15 years.

For payment of the fee:

For the annual amortization:

If you want to know this figure in greater depth from a commercial point of view, you can access this article from La LEY by clicking here.

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