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Answer :
Answer:
2. when performance obligations are satisfied.
Explanation:
Franchise fee is paid to the franchisor to become part of the franchise.
Obligations by the franchisor are satisfied when:
1. When the franchisor does not have any financial repayments to make.
2. Initial services are all performed, for example some agreements require franchisor to train new franchise staff.
Usually franchise fee is paid upfront, and then regular payments areade by the franchise to the franchisor to remain a member.
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Final answer:
Franchise fees should be recognized when performance obligations are satisfied, in line with the principle of revenue recognition that mirrors the transfer of goods or services to customers.
Explanation:
The recognition of franchise fees is tied to the principle of revenue recognition according to which revenues are recognized when the performance obligations under the contract are fulfilled. Therefore, franchise fees should be recognized when performance obligations are satisfied. This approach aligns with the accounting standards that require revenue to be recognized in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services.
In a franchising arrangement, performance obligations could include providing initial training, supply chain support, and assistance in setting up operations. Once these obligations are fully satisfied, the franchisor recognizes the franchise fees as revenue, regardless of the actual date the contract was signed, the franchise was opened for business, or the franchise fee was paid.
