Need to Know: IFRS 10 - Consolidated Financial ... - BDO Canada

40 IFRS 10 Consolidated Financial Statements7.6.3. FranchisesIAS 27(2008) did not provide guidance on the accounting for franchise arrangements. In contrast, IFRS 10 specificallyaddresses franchises in paragraphs B29 to B33. IFRS 10.B29 describes a franchise agreement as being an arrangementthat often gives the franchisor:––Rights that are designed to protect the franchise brand––Certain decision-making rights with respect to the operations of the franchisee.IFRS 10.B30 notes that the franchisor’s rights do not necessarily result in a current ability to direct the relevantactives. This means that the franchisor will usually not control a franchisee simply because there is a franchisearrangement in place; other factors are required. It is also noted that a franchise arrangement in general does notrestrict other parties’ (e.g. the franchisee’s) ability to make decisions about relevant activities. The lower the level offinancial support provided by the franchisor and the lower the franchisor’s exposure to variability of returns from thefranchisee the more likely it is that the franchisor has only protective rights (IFRS 10.B33).It is necessary to distinguish between the current ability to make decisions that significantly affect the franchisee’sreturns (which the franchisor usually does not have) and the ability to make decisions that protect the franchisebrand (which the franchisor usually has). A franchisor does not have power over the franchisee if other parties haveexisting rights that give them the current ability to direct the relevant activities of the franchisee (IFRS 10.B31).This is because the franchisee has made a unilateral decision when they entered into the franchise agreement tooperate its business in accordance with the terms of the franchise agreement, but for its own account (IFRS 10.32).