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Rakhi Vasavada
Rakhi Vasavada, Financial and Legal Consultant
Category: Finance
Satisfied Customers: 4543
Experience:  Graduated in law with Emphasis on Finance and have have been working in financial sector for over 12 Years
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We have taken over several franchisor accounts to do an

Customer Question

we have taken over several franchisor accounts to do an audit. the previous audfitors capitalized the initial FDD (the franchisor package) and left it on the balance sheet expensing or amortizxing since thery considered a long life ass with an undeterminable life. please advise if we just leave sit or require some wrteoff or amortiaztion or restatement. ther is no impairment.
Submitted: 1 year ago.
Category: Finance
Expert:  Rakhi Vasavada replied 1 year ago.

Dear Friend,

Hello and welcome. Thank you for providing an opportunity to assist you.

Under accounting rules, certain expenses can be capitalized -- or recorded as an asset on a company's balance sheet -- while others must be expensed immediately. The logic is that spending that results in future benefits over multiple years shouldn't be expensed right away. Examples would include buying a factory, upgrading equipment or acquiring multiyear franchise rights, the effects of which will be felt for years to come.

Having said this, The same rules of capitalization and amortization apply to franchise rights. Since most franchise agreements span multiple years, they usually qualify for capitalization. Thus, a $100,000 payment to run a restaurant franchise for five years would be capitalized as a long-term asset.

FROM WHAT I understand from the situation, just see if the franchisor package / agreement mention the TERM of a franchisee. If yes, then you will have to amortize it for that number of years dividing it in equal numbers.

If this is not the case, then you just leave sit on it if no tenure / useful life is expressly defined.

I am sure this would help.

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Warm Regards,

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