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Reporting and disclosure requirements of a Franchise Fee

Does anyone know the correct accounting treatment and necessary disclosure in the financial statements for a one-off Franchise fee payment. The franchise agreement is for a period of five years. The Franchise agreement can be renewed at the end of five years, however there is no requirement to do so.

It is my opinion, that the Franchise fee paid (£8,500) is an intangible fixed asset and should be written off over 5 years (the term of the franchise agreement) on a straight line basis.

The company is a limited company and qualifies as a small company.

Anita

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By admin
05th Jul 2000 10:01

Yes the treatment is correct.
The Fee should be capitalised as an IFA and amortised over five years. I was in franchising for many years and this was the treatment determined by my accountants Grant Thornton. There is no guarantee that the agreement will be renewed so it would be imprudent to extend the write-off period beyond this.

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By SimonP
06th Jul 2000 02:26

Franchise expenses
I recall dealing with a similar case some years ago. There was a franchise package fee which was broken down into component parts such as tools, consumable materials, plant, stationery and advertising. This was supported by documentation and agreed with the Revenue as either being capital or revenue in the usual way. I should add that the Revenue initially resisted claims for tax relief stating S Ltd v. J.M. O'Sullivan, but climbed down when presented with an irrefutable breakdown of the package fee.
Once we had agreed the component parts, all that was left as the purchase of patent rights and/or "know how" and Capital Allowances are claimed on a 25% WDA each year (see ICTA 1988 s520, s530).
Hope that helps a little.

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