Accounting for franchises;

              70 HASKINS & SELLS September
Accounting for Franchises
IT IS surprising how strangely lacking in
completeness are books on accounting
in their treatment of accounting for fran­chises.
Any number of good books, both
in the engineering and the accounting
fields, discuss at length the theory of fran­chises
and their valuation, but few deal
adequately, if at all, with the accounting
therefor and particularly the amortization
thereof.
A franchise, being a governmental grant
for the use of property, either for a term of
years or in perpetuity, is obtained fre­quently
without much expense or cost,
except for legal services. In other in­stances,
lump sum payments of consider­able
or of large size may be necessary in
order to obtain the grant. It also hap­pens,
as a rule, that when franchises pass
from the original grantee to some subse­quent
holder there is considerable money
value involved. Where the expenses in
connection with obtaining a franchise are
insignificant, there is little need for con­cern
as to their disposition. On the other
hand, where considerable amounts are in­volved
and the term of the franchise is less
than perpetuity, there is an element of
deferred cost which may not with propriety
be overlooked. To charge the first cost
of obtaining a franchise where any con­siderable
amount is involved to one year,
would be to work an injustice to the stock­holders
of that particular year. To spread
the cost over the life of the franchise is the
method usually accepted as being proper,
since it equalizes the charges among the
years benefited by the franchise and bears
a proper relation to the shareholders of the
various years.
A franchise for a term of years is a wast­ing
asset, and like physical property should
be written down or amortized through a
reserve. A franchise in perpetuity offers
no basis for such treatment, but may be
re-valued from time to time as conditions
warrant. Amortization of term franchises
should follow the straight line method,
which results in a charge to operations
annually of equal amount. The use of
any method other than the straight line
is to be deplored for the reason that any
other method will result in unequal annual
charges to operations.
The treatment of franchises sometimes
becomes a more difficult one where, after
having been in existence and undergoing
process of amortization for some time, two
or more franchises are merged and super­seded
by a more comprehensive one. In a
case of this kind the question is what to do
with the unamortized cost of contributing
franchises, which question is usually set­tled
by merging the unamortized cost of
old franchises with the cost of obtaining
the superseding franchise, and spreading
the whole cost over the period of years
representing the life of the new franchise.
It sometimes happens that physical
property is also closely related to fran­chises,
and it is regarded as entirely proper
from the point of view of good accounting
that the depreciated cost of such physical
property shall be included in the cost of the
new franchise, and, in like manner, spread
over the succeeding period of years during
which the franchise runs. Thus, in a case
where water rights with a power generating
station are superseded by a larger project
which absorbs the rights first named and
wipes out the site of the first generating
station, it appears proper that the cost of
the new franchise should include not only
the unamortized cost of the original fran­chise,
but the depreciated cost of the phys­ical
property representing the generating
station, less any salvage resulting from the
scrapping thereof.
It would be illuminating if authors in
treating this important subject would give