For Crowne Plaza, at what value is the net investment in the lease initially recognized?
Crowne_Plaza Franchise · 2025 FDDAnswer from 2025 FDD Document
The lease liability is initially measured at the present value of the lease payments to be made over the lease term. The lease payments include fixed payments (including 'in-substance fixed' payments) and variable lease payments that depend on an index or a rate (initially measured using the index or rate at commencement), less any lease incentives receivable. 'In-substance fixed' payments are payments that may, in form, contain variability but that, LQဩVXEVWDQFH DUH unavoidable. In calculating the present value of lease payments, the Company uses its incremental borrowing rate at the lease commencement date if the interest rate implicit in the lease is not readily determinable.
The lease term includes periods subject to extension options which the Company is reasonably certain to exercise and excludes the effect of early termination options where the Company is reasonably certain that it will not exercise the option. Minimum lease payments include the cost of a purchase option if the Company is reasonably certain it will purchase the underlying asset after the lease term.
After the commencement date, the amount of lease liabilities is increased to reflect the accretion of interest and reduced for lease payments made. The carrying amount of lease liabilities is remeasured if there is a modification, a change in the lease term or a change in the lease payments as a result of a rent review or change in the relevant index or rate.
For operating leases, lease expense related to fixed payments is recognized on a straight-line basis over the lease term within 'property and other taxes, insurance and leases' in the consolidated statements of net income.
Variable lease payments that do not depend on an index or a rate are recognized as an expense in the period over which the event or condition that triggers the payment occurs.
Source: Item 23 — Receipts (FDD pages 100–424)
What This Means (2025 FDD)
According to the 2025 Crowne Plaza Franchise Disclosure Document, the lease liability is initially measured at the present value of the lease payments to be made over the lease term. These lease payments include fixed payments, 'in-substance fixed' payments, and variable lease payments that depend on an index or a rate, initially measured using the index or rate at commencement, less any lease incentives receivable. 'In-substance fixed' payments are defined as payments that may contain variability in form but are unavoidable in substance.
To calculate the present value of lease payments, Crowne Plaza uses its incremental borrowing rate at the lease commencement date if the interest rate implicit in the lease is not readily determinable. The lease term includes periods subject to extension options which the company is reasonably certain to exercise and excludes the effect of early termination options where the company is reasonably certain that it will not exercise the option. Minimum lease payments include the cost of a purchase option if the company is reasonably certain it will purchase the underlying asset after the lease term.
After the commencement date, the amount of lease liabilities is adjusted to reflect the accretion of interest and reduced for lease payments made. The carrying amount of lease liabilities is remeasured if there is a modification, a change in the lease term, or a change in the lease payments due to a rent review or change in the relevant index or rate. For operating leases, lease expense related to fixed payments is recognized on a straight-line basis over the lease term within 'property and other taxes, insurance and leases' in the consolidated statements of net income. Variable lease payments that do not depend on an index or a rate are recognized as an expense in the period over which the event or condition that triggers the payment occurs.
For a potential Crowne Plaza franchisee, this means that the initial recognition of the lease liability will significantly impact their financial statements and ongoing expenses. Understanding how these lease liabilities are calculated, including the factors considered such as fixed versus variable payments, the incremental borrowing rate, and potential lease incentives, is crucial for accurate financial planning and forecasting. Franchisees should carefully review the lease terms and consult with financial advisors to fully understand the implications of these lease accounting policies.