Under what circumstances are Crowne Plaza's contract assets reviewed for impairment, and how is the impairment loss calculated and charged?
Crowne_Plaza 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.
Source: Item 23 — Receipts (FDD pages 100–424)
What This Means (2025 FDD)
According to Crowne Plaza's 2025 Franchise Disclosure Document, contract assets, which typically represent amounts paid at the beginning of a contract, are reviewed for impairment when events or changes in circumstances suggest that the carrying value of the asset may not be recoverable. This means that if there are indicators that the initial value of the asset is no longer justified by its expected future benefits, Crowne Plaza will assess whether an impairment has occurred. These contract assets are tested for impairment based upon estimated future cash flows rather than with reference to expected credit losses.
If the estimated undiscounted cash flows are less than the carrying value, Crowne Plaza recognizes an impairment loss. The impairment loss is calculated as the difference between the carrying value of the asset and its estimated fair value. The fair value, in turn, is based on estimated discounted future cash flows. This process ensures that the value of the contract asset on Crowne Plaza's balance sheet reflects its true economic value, considering the time value of money and the risks associated with realizing those cash flows.
For a prospective Crowne Plaza franchisee, this accounting practice is important because it affects the financial statements of the company. While the franchisee may not directly deal with these calculations, understanding that Crowne Plaza regularly assesses the value of its assets and adjusts them as necessary provides insight into the financial management and transparency of the company. It also assures that the financial statements reflect a realistic view of the company's financial health, as assets are not overstated if their value has diminished.