How is the fair value determined for Atwell Suites contracts when calculating impairment loss?
Atwell_Suites Franchise · 2025 FDDAnswer from 2025 FDD Document
Amounts paid to hotel owners to secure franchise agreements ("key money") are treated as consideration payable to a customer. A contract asset is recorded which is recognized as a deduction to franchise royalty fee revenue over the initial term of the agreement. Typically, contract assets are not financial assets as they represent amounts paid at the beginning of a contract, and so are tested for impairment based upon future cash flows rather than with reference to expected credit losses. Contract assets are reviewed for impairment when events or changes in circumstances indicate that the carrying value may not be recoverable. If the estimated undiscounted cash flows, are less than carrying value, an impairment loss is charged to the income statement based on the difference between the carrying value and the estimated fair value. Fair value is based on estimated discounted future cash flows. No impairment loss was recognized in any of the years ended December 31, 2024, 2023 or 2022.
Source: Item 23 — Receipts (FDD pages 99–486)
What This Means (2025 FDD)
According to Atwell Suites's 2025 Franchise Disclosure Document, the fair value of contract assets is determined based on estimated discounted future cash flows when assessing impairment loss. Contract assets, which typically represent key money paid to hotel owners to secure franchise agreements, are reviewed for impairment when there are indications that their carrying value may not be recoverable.
If the estimated undiscounted cash flows are less than the carrying value, Atwell Suites recognizes an impairment loss. This loss is calculated as the difference between the carrying value and the estimated fair value of the contract asset. The fair value, in turn, is based on the estimated discounted future cash flows expected from the franchise agreement.
It's important to note that Atwell Suites did not recognize any impairment loss in the years ended December 31, 2024, 2023, or 2022, suggesting that the carrying values of their contract assets were supported by their estimated future cash flows during those periods. This accounting practice ensures that the value of Atwell Suites's assets reflects their true economic worth, and that any potential losses are recognized in a timely manner.