What accounting standard regarding leases did Best Western adopt on December 1, 2022?

According to Best Western's 2025 Franchise Disclosure Document, the company adopted ASU 2016-02, "Leases (Topic 842)," effective December 1, 2022, using a modified retrospective approach. This accounting standard requires Best Western, as a lessee, to recognize a lease liability and a right-of-use asset for leases exceeding twelve months. It also introduces new presentation and disclosure requirements for both lessees and lessors. The lease liability is measured at the present value of lease payments not yet paid, while the right-of-use asset represents the right to use the underlying asset over the lease term and is based on the liability, subject to certain adjustments. For financial statement purposes, the standard maintains the dual model, classifying leases as either operating or finance leases, with operating leases resulting in straight-line expense and finance leases resulting in a front-loaded expense pattern. The accounting guidance for lessors remains largely unchanged.

For a prospective Best Western franchisee, this means that any property leases they enter into for longer than twelve months will need to be accounted for in accordance with ASU 2016-02. This will involve recognizing a lease liability and a right-of-use asset on the balance sheet, which could impact their financial ratios and overall financial position. Understanding the classification of leases as either operating or finance leases is also crucial, as it affects the expense recognition pattern. Operating leases result in a consistent expense over the lease term, while finance leases result in higher expenses in the early years of the lease.

Best Western elected to apply the standard as of the effective date and has not adjusted its comparative period consolidated financial statements for the effects of the new standard or made the new, expanded required disclosures for years prior to the effective date. The consolidated financial statements for the year ended November 30, 2023, reflect the application of ASC 842, while the consolidated financial statements for the year ended November 30, 2022, were not adjusted and continue to be reported under the accounting guidance, ASC 840, Leases ("ASC 840"), in effect for that year. Best Western also elected the package of practical expedients permitted under the transition guidance in ASC 842 and did not reassess prior conclusions related to contracts containing leases, lease classification, and initial direct costs. The adoption of the new lease standard resulted in the recognition of operating lease ROU assets and lease liabilities for lease arrangements with an initial term greater than twelve months, but did not have a material impact on the company's consolidated financial statements.