Franchisee Accounting: Recognition, Measurement, and Disclosure
- Graziano Stefanelli
- Apr 22
- 4 min read

Franchise arrangements offer entrepreneurs a way to operate established business models with brand support, while enabling franchisors to expand with limited capital. For the franchisee, acquiring a franchise typically involves paying up-front fees, ongoing royalties, and meeting various contractual obligations — all of which must be accurately reflected in financial statements.
Franchisee accounting is governed by the general principles of accrual accounting, but it also involves specific considerations around intangible assets, contract rights, leases, and service costs. This article outlines how franchisees should recognize, measure, and disclose key financial elements related to franchise operations, under both U.S. GAAP and IFRS frameworks.
1. Understanding the Franchise Relationship
In a franchise arrangement, the franchisor grants the franchisee the legal right to operate a business using its name, systems, and intellectual property.
The franchisee usually agrees to:
Pay an initial franchise fee
Remit ongoing royalties
Purchase certain goods or services from the franchisor
Comply with brand and operational standards
From an accounting perspective, these transactions involve the acquisition of rights and ongoing service obligations, often with contractual limitations and dependencies.
2. Recognition and Measurement of the Initial Franchise Fee
A. Nature of the Initial Fee
The initial fee typically grants:
Access to the franchisor’s brand and know-how
Assistance with site selection, training, or setup support
A non-exclusive license to operate within a defined territory
B. Accounting Treatment
The initial fee is generally not expensed immediately. Instead:
It is capitalized as an intangible asset representing the right to operate under the franchise agreement.
Under U.S. GAAP (ASC 350-30)Â and IFRS (IAS 38), intangible assets are recognized when:
They are identifiable
The entity has control over the asset
Future economic benefits are expected
The cost can be measured reliably
If the franchisor provides substantive services in exchange for the fee (e.g., extensive training, customization), the franchisee may be required to allocate a portion of the fee to prepaid services and expense them over time as services are received.
C. Amortization
The capitalized franchise right is amortized over the term of the franchise agreement, typically on a straight-line basis, unless another method better reflects the consumption of economic benefits.
If the agreement includes a renewal option, amortization may be based only on the initial term, unless renewal is highly probable and the terms are known.
3. Ongoing Royalties and Periodic Fees
Most franchisees are required to pay royalties based on gross revenue or other performance metrics.
A. Expense Recognition
Under both GAAP and IFRS, royalty payments:
Are recognized as operating expenses in the period they are incurred
Are not capitalized, even if they relate to the use of intellectual property
Are typically classified as selling, general, and administrative expenses (SG&A)
If the franchise agreement includes marketing or advertising fees, these are also expensed as incurred, unless specific benefits are deferred and identifiable (e.g., prepaid media buys with future value).
4. Leases and Property Considerations
In some franchise models, the franchisor leases property to the franchisee or subleases locations to them.
Under ASC 842 (U.S. GAAP)Â and IFRS 16 (IFRS):
Most property leases are classified as finance leases (formerly capital leases) or operating leases
The franchisee must recognize:
A right-of-use asset
A lease liability
Initial direct costs associated with lease execution
The accounting depends on whether the franchisee controls the asset and bears most of the risks/rewards of ownership.
5. Advertising and Initial Setup Costs
Franchisees typically incur significant pre-opening expenses, including:
Equipment purchases
Inventory setup
Hiring and training staff
Local advertising campaigns
These costs are treated as follows:
Training and startup costs are expensed as incurred (not capitalized)
Inventory and equipment are recognized as assets when control transfers
Prepaid advertising is deferred and expensed over the benefit period, if applicable
No special capitalization rules apply solely because the entity is a franchisee — the usual asset recognition rules prevail.
6. Borrowings and Franchise Finance Agreements
Many franchisees fund the initial fee and setup costs with franchise-specific loans or franchisor-financed arrangements.
The accounting treatment mirrors standard loan accounting:
Record a loan liability at the amount borrowed
Recognize interest expense over the loan term using the effective interest method
If fees are embedded in the financing agreement, assess whether they should be capitalized or treated as a finance cost
Debt covenants tied to performance, minimum net worth, or royalty payment ratios may require additional disclosures and monitoring.
7. Impairment Considerations
The capitalized franchise right is a finite-lived intangible asset and is subject to impairment testing under:
ASC 360 (U.S. GAAP)
IAS 36 (IFRS)
Triggering events include:
Poor financial performance of the franchise unit
Adverse changes in legal or economic environment
Loss of exclusive rights or contract modifications
If the carrying amount exceeds the recoverable amount, an impairment loss is recognized in the income statement.
8. Required Disclosures
Franchisees must disclose in their financial statements:
The nature and useful lives of intangible assets related to franchise rights
Amortization methods and periods
Carrying amounts and accumulated amortization
Impairment losses, if any
Lease obligations, including future payments and classification
Related party transactions, particularly if the franchisor is a shareholder or affiliate
Under IFRS, additional disclosures may be required for judgments and estimates used in valuing intangible assets.
9. Differences Between U.S. GAAP and IFRS

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Franchisee accounting involves more than just recording franchise fees. It requires careful evaluation of:
The nature of rights and services acquired
The measurement and amortization of intangible assets
The proper recognition of recurring fees
Related leases, startup costs, and financial obligations