Understanding Franchise Fees: Accounting for Initial and Ongoing Costs as Assets and Expenses.

The initial franchise fee plus the present value of estimated future fees paid to the franchisor for future services are capitalized at the beginning of the franchise period.

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When a franchise agreement is signed, the franchisee typically pays an initial franchise fee to the franchisor. Additionally, the franchisee usually agrees to pay ongoing fees to the franchisor for services such as marketing, support, and training.

To account for these fees, they are capitalized at the beginning of the franchise period. This means that the franchisee records the fees as assets on their balance sheet, since they represent future economic benefits to the franchisee.

The present value of estimated future fees paid to the franchisor is also included in the amount that is capitalized. This is because these future fees represent an obligation of the franchisee, and therefore reduce the economic benefits of the franchise.

Over time, the franchisee will amortize the capitalized initial franchise fee and future fees paid to the franchisor as expenses on their income statement. This reflects the fact that the franchisee is using up the rights and services provided by the franchisor over time.

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