Finance

We refer to your query on the presentation of the Franchise item in your balance sheet as of 30 June 2009 as follows

Non-Current Assets              

Investments         745,000
Property, plant and equipment (net)      3,845,000
Franchise fee (at revaluation)                    150,000
Total Non-Current Assets      4,740,000

We also wish to clarify the following additional queries which you have forwarded to us as follows

Whether the franchise fee treatment and disclosure currently complies with appropriate Australian Accounting Standards and if not

Identify the modifications, which are required to ensure compliance, including an amended extract of the balance sheet and relevant note disclosures that will accompany the financial statements in relation to the franchise fee.
 
We have taken note of the following transactions entries which you have sought clarification for (1) that the franchise which was the only one owned by the company was purchased from the franchisor for 100,000 one year ago on 1 July 2008 and (2) the franchise is for a renewable five-year period with an additional payment of 100,000 and no further renewals are to be granted. (3) The franchise is to be returned after the renewal period (4) a revaluation was made 31 December 2008 from 100,000 to 150,000 debiting Franchise fee for 50,000 and crediting Asset revaluation reserve.    

Initially, franchise transactions are mirror transactions between a franchisor and a franchisee which means both sides of the partners are gseeoverned by provisions on recording, valuation and reporting of franchise items and processes held involving acquisition, initial and subsequent payments if any, treatment of payments, accounts to be used, amortization of fees and even the aspect of valuation which is aptly covered under International Accounting Standards (IAS) 36 otherwise known as Impairment of Assets. Although valuation pertains more to the books of the franchisor, the amortization of franchise fees applies specifically with the franchisee. Thus, revaluation or impairment concern more the franchisors books rather the franchisee. (IASC, 1998)

Further, on the part of the franchisee, the payment and amortization of franchise fees are governed by the rules and standards on payments and their recording treatment along outright expense booking and amortization. In this case, the nature of payment qualifies for a five-year amortization until the next payment is made and subject to the next round of amortization.
  
Based on our analysis of the account, we have determined the following
Comments and recommendations for your consideration
The presentation of the carrying amount of Franchise account does not comply with the provision of International Accounting Standards (IAS) 38 on Intangibles which states that  
Carrying amount is the amount at which an asset is recognized in the balance sheet after deducting any accumulated amortisation and accumulated impairment losses thereon.

Revaluation is therefore not applicable instead the amortized value must be presented in the Balance Sheet or Statement of Financial Position.

Based on your data provided, the carrying amount of the Franchise fee should be net of the applicable amortization annually provided for five years. Hence, during the end of the first year after acquisition, the carrying amount is about 80,000. Here, balance sheet should indicate a balance of 4.76M for non-current assets recast as follows

Non-Current Assets              

Investments         745,000
Property, plant and equipment (net)      3,845,000
Franchise fee (net of amortization)                       80,000
Total Non-Current Assets      4,670,000

The amortization of the Franchise fee is based on the 5-year contract after which the account will have become zero, until renewed, in which case a new round of amortizations will take place.

All other information pertaining to the acquisition, amortization, renewal scheme of the Franchise account shall be disclosed in the Notes to the Financial Statements.