11.1 Franchise Operations and Consignment Sales

Franchise Operations and Consignment Sales

Franchise operations carry five items in the AFAR TOS, one of the largest single allocations in the subject, and consignment sales carry one more. Both are examined from the seller's side: the franchisor's revenue, cost, and gross profit, and the consignor's remittance, ending inventory, and net income.

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1. The Franchisor's Performance Obligations

A franchise agreement typically bundles several promises. Under PFRS 15, the franchisor identifies which are distinct:

The initial franchise fee is the transaction price for the upfront promises and is allocated to them by relative stand-alone selling prices. If collection of a note is not probable, the contract fails Step 1 and cash received is a liability until the criteria are met. If payment is deferred for more than one year, a significant financing component is separated as interest income.

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2. Worked Example: Franchisor Revenue, Cost, and Gross Profit

On January 1, 2026, Manila Burger Corp. signs a five-year franchise with a Legazpi franchisee for an initial fee of PHP 1,500,000, paid in cash on signing. The fee covers:

• the franchise license, stand-alone selling price PHP 1,050,000;
• site selection and training, completed when the store opens on March 31, 2026 (SSP PHP 300,000; cost to Manila Burger PHP 180,000); and
• kitchen equipment delivered at opening (SSP PHP 150,000; cost PHP 110,000).

The continuing fee is 5% of the franchisee's sales, which were PHP 8,000,000 from April to December 2026. The SSPs total the fee, so no discount is allocated.

Direct costs of the services (PHP 180,000) and equipment (PHP 110,000) are expensed as the related obligations are satisfied, so gross profit on the initial fee items recognized in 2026 is 300,000 + 150,000 + 157,500 - 180,000 - 110,000 = PHP 317,500, before continuing fees. At December 31, 2026, the unearned part of the license, 1,050,000 - 157,500 = PHP 892,500, is a contract liability.

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3. Consignment Sales in the Consignor's Books

In a consignment, the consignor owns the goods until the consignee sells them to an end customer. The consignor therefore keeps the goods in its inventory (as "inventory on consignment") and recognizes revenue only when the consignee sells.

Three computations recur:

$\text{Amount remitted} = \text{Consignment sales} - \text{Commission} - \text{Consignee's reimbursable expenses}$

$\text{Inventory on consignment} = \text{Unsold units} \times (\text{Unit cost} + \text{Consignor's unit freight and handling to the consignee})$

$\text{Net income on consignment} = \text{Sales} - \text{Cost of goods sold (with freight)} - \text{Commission} - \text{Other consignment expenses}$

Costs of shipping goods to the consignee are inventoriable and follow the goods; costs incurred by the consignee to deliver goods to end customers, and the commission, are expenses of the period of sale.

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4. Worked Example: Consignment

Batangas Furniture ships 100 dining sets costing PHP 6,000 each to a consignee in Quezon City and pays freight of PHP 20,000 (PHP 200 per set). The consignee sells 60 sets at PHP 10,000 each, deducts a 15% commission and PHP 6,000 of delivery costs it paid for the sold sets, and remits the balance.

A consignee never records the consigned goods as its inventory; it records only its commission income and the payable to the consignor for cash collected.

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5. Consignor's Journal Entries (Separate Consignment Records)

Using the Batangas Furniture example:

After these entries, Inventory on Consignment has a balance of 600,000 + 20,000 - 372,000 = PHP 248,000, matching the 40 unsold sets. In the consignee's books, the goods never appear as inventory; the consignee records a liability to the consignor for collections and commission income of PHP 90,000.

The same logic explains why franchise and consignment problems are grouped under revenue: in both, the key question is when control of the good or service passes, not when cash is received or goods leave the seller's warehouse.