Reference no: EM131808999
Problem
Pizza Haven is a global pizza franchise that sells pizzas and pasta dishes through quick-service restaurants. On 1July 2016, Wilson Pty Ltd (the franchisee) entered into a franchise agreement with Pizza Haven (the franchisor).
The terms of the franchise agreement included the following:
- The initial franchise fee payable by Wilson Pty Ltd is $60,000 plus GST.
- Payment of the initial franchise fee gives Wilson Pty Ltd the right to use the Pizza Haven brand nameand the exclusive right to operate a Pizza Haven restaurant in the Sydney CBD.
- Pizza Haven will assist Wilson Pty Ltd in locating suitable premises. Wilson Pty Ltd is responsible forthe following costs: fitting out the premises; acquisition of equipment, fixtures and fittings; and initialmarketing and promotion costs.
- Employees of Wilson Pty Ltd will be trained by Pizza Haven and the cost of training has been includedin the initial franchise fee.
- Wilson Pty Ltd is required to pay a monthly royalty fee of 7% of gross sales and a yearly marketing feeof 4% of gross sales.
- The term of the franchise agreement is ten years. Wilson Pty Ltd can renew the franchise agreementevery ten years.
Although there is no fee for renewing the franchise agreement, Pizza Haven will onlyrenew the franchise agreement if Wilson Pty Ltd has not committed any serious breaches of thefranchise agreement and has satisfied Pizza Haven's performance requirements based on meetingrevenue levels. Wilson Pty Ltd intends to continually renew the franchise agreement.
- Wilson Pty Ltd is not permitted to sell or transfer the franchise.
Costs incurred by Wilson Pty Ltd were as follows:
- Paid $5,500 (including GST of $500) on 24 June 2016 for fees for legal and business advice relating tothe franchise.
- Paid the initial franchise fee of $66,000 (including GST of $6,000) to Pizza Haven on 1 July 2016.
- Paid $22,000 (including GST of $2,000) on 14 July 2016 for marketing and promotion.
- Paid 88,000 (including GST of $8,000) on 21 July to fit out the restaurant.
- Paid a non-refundable deposit (representing 10% of the total cost) of $13,200 (including GST of$1,200) on 25 July 2016 for equipment and fixtures.
- Paid $11,000 (including GST of $1,000) on 28 July 2016 for inventory.
Wilson Pty Ltd is entitled to a refund of the GST paid on all of the above payments.Although franchisees cannot sell or transfer their franchise, they are permitted, subject to the approval of PizzaHaven, to sell their entire business including the franchise agreement. A recent analysis of such sales indicatedthat the franchises were traded at prices that reflected more than the remaining term of the franchiseagreement. For example, in May 2016, a franchisee who had operated a Pizza Haven restaurant for eight years(with two years of the franchise agreement remaining) sold their business for $900,000. This price included$50,000 specifically for the franchise agreement.
Required
(a) Explain why the franchise agreement satisfies the definition of an intangible asset in AASB 138Intangible Assets.
(b) How, according to AASB 138 Intangible Assets, are separately acquired intangible assets measured oninitial recognition? At what amount would Wilson Pty Ltd recognise the franchise agreement on initialrecognition?
(c) Apply the requirements of AASB 138 Intangible Assets and discuss whether the useful life of thefranchise agreement should be assessed as finite or indefinite.