How does Best Western classify its leases, and what factors are considered in this classification?
Best_Western Franchise · 2025 FDDAnswer from 2025 FDD Document
The Company primarily leases office space, vehicles, and office equipment from third parties. The Company determines if a contract is a lease at inception. A contract contains a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. The lease term begins on the commencement date, which is the date the Company takes possession of the asset and may include options to extend or terminate the lease when it is reasonably certain that the option will be exercised. Certain of the Company's leases contain renewal options for varying periods, which can be exercised at the Company's sole discretion. Leases are classified as operating or finance leases based on factors such as the lease term, lease payments, and the economic life, fair value and estimated residual value of the asset. Where leases include options to purchase the leased asset at the end of the lease term, this is assessed as a part of the Company's lease classification determination.
Under Accounting Standards Codification ("ASC") Leases ("ASC 842"), which the Company adopted as of December 1, 2022 (see note 1(u)), the Company recognizes a right-of-use ("ROU") asset and lease liability to account for its leases. ROU assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent the Company's obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized on the commencement date based on the present value of lease payments over the lease term. ROU assets are based on the lease liability and are increased by prepaid lease payments and decreased by lease incentives received. Lease incentives are amortized through the lease asset as reductions of expense over the lease term. For leases where the Company is reasonably certain to exercise a renewal option, such option periods have been included in the determination of the Company's ROU assets and lease liabilities.
Source: Item 23 — Receipts (FDD pages 108–413)
What This Means (2025 FDD)
According to the 2025 FDD, Best Western classifies its leases as either operating or finance leases. This classification is based on several factors, including the lease term, the lease payments, the economic life of the asset, the fair value of the asset, and the estimated residual value of the asset. Best Western also considers whether the lease includes an option to purchase the leased asset at the end of the lease term as part of its lease classification determination.
Best Western adopted Accounting Standards Codification ("ASC") Leases ("ASC 842") as of December 1, 2022. Under ASC 842, Best Western recognizes a right-of-use ("ROU") asset and lease liability to account for its leases. The ROU asset represents Best Western's right to use an underlying asset for the lease term, while the lease liabilities represent the company's obligation to make lease payments arising from the lease.
ROU assets and lease liabilities are recognized on the commencement date based on the present value of lease payments over the lease term. ROU assets are based on the lease liability and are increased by prepaid lease payments and decreased by lease incentives received. Lease incentives are amortized through the lease asset as reductions of expense over the lease term. For leases where Best Western is reasonably certain to exercise a renewal option, such option periods have been included in the determination of the company's ROU assets and lease liabilities.