What components are included in the measurement of Best Western's ROU (right-of-use) assets and lease liabilities?
Best_Western Franchise · 2025 FDDAnswer from 2025 FDD Document
Under Accounting Standards Codification ("ASC") Leases ("ASC 842"), the Company recognizes a right-of-use ("ROU") asset and lease liability to account for its operating 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 (which represents the present value of remaining lease payments) 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.
Leases typically contain rent escalations over the lease term. The Company recognizes expense for these leases on a straight-line basis over the lease term. Certain leases require the Company to pay taxes, insurance, maintenance and other operating expenses associated with the leased asset. Such amounts are not included in the measurement of the ROU assets and lease liabilities to the extent they are variable in nature. These variable lease costs are recognized as a variable lease expense when incurred.
Source: Item 23 — Receipts (FDD pages 108–413)
What This Means (2025 FDD)
According to Best Western's 2025 Franchise Disclosure Document, the company recognizes right-of-use (ROU) assets and lease liabilities for its operating leases. These ROU assets represent Best Western's right to use an underlying asset for the lease term, while the lease liabilities represent the obligation to make lease payments arising from the lease. Both are recognized on the date the lease commences, based on the present value of lease payments over the lease term.
The calculation of ROU assets is based on the lease liability, which is the present value of the remaining lease payments. This amount is then increased by any prepaid lease payments and decreased by any lease incentives received. Lease incentives are amortized over the lease term, reducing expenses related to the asset. If Best Western is reasonably certain to exercise a renewal option on a lease, the period covered by that option is included when determining the ROU assets and lease liabilities.
However, certain costs are excluded from the measurement of ROU assets and lease liabilities. Specifically, any taxes, insurance, maintenance, and other operating expenses associated with the leased asset are not included if they are variable in nature. These variable lease costs are recognized as a variable lease expense when they are incurred. This means that while the base lease payments and any reasonably certain renewal periods are factored into the ROU asset and liability calculations, fluctuating costs related to the asset's operation are accounted for separately as they arise.