In France, franchising is defined as « an arrangement whereby a business grants independent businesses, in exchange for a royalty, the right to use its commercial name and trade mark in order to sell products or services. The agreement is generally accompanied by technical assistance».
From an accounting point of view, the above operations have to be recorded as follows by the franchisee. Royalties due to the franchisor are Operating Expenses, to be booked during the same period as the related sales.
The entrance fee must be recorded upon signature of the agreement. There is no predefined accounting method, as the entrance fee can be of different types:
1- Entrance fee relating to a franchising agreement with limited duration, non-transferable to a third party: this fee is an Expense and cannot be spread out, starting from the financial years opened in 2005.
2- Part of entrance fee which pays the franchisor for services required to start the franchised business (advertising, training, …): this is either an Expense which cannot be spread out, starting from the financial years opened in 2005, or Start-up-costs with a maximum depreciable life of 5 years, if complying with activation criteria (non-preferential method).
3- Part of entrance fee to pay the right to use intangible items (trade mark and know-how) provided by the franchisor: this is an Intangible Asset, amortizable over the duration of the operating monopoly stipulated in the agreement. Every year, a valuation test shall be carried out, possibly resulting in an extraordinary depreciation allowance.
4- Finally, the franchisor may provide services in connection with the total or part installation of the franchisee’s operating premises: they have to be recorded as Tangible Assets.
