How does Embassy Suites amortize franchise contracts?
Embassy_Suites Franchise · 2025 FDDAnswer from 2025 FDD Document
We capitalize consideration paid to incentivize hotel owners to enter into franchise contracts with us as contract acquisition costs and, together with other incremental costs to obtain franchise contracts, both of which are generally fixed, as franchise contracts, net in our balance sheet. During the year ended December 31, 2024, we recorded franchise contract intangible assets related to the acquisition of the Graduate brand (refer to Note 3: "Acquisition" for additional information). Franchise contracts are amortized using the straight-line method over their respective estimated useful lives, which is the contract term, generally including any extension periods that are at our sole option, and are generally 10 to 20 years. Amortization begins on the opening date of the hotel to which the franchise contract relates or the contract execution date, whichever is later. Amortization of franchise contract acquisition costs is recognized as a reduction to franchise royalty fees and amortization of costs to obtain franchise contracts is recognized as amortization expense in our statement of comprehensive income and member's equity. Cash flows for both contract acquisition costs and costs to obtain a contract are included as operating activities in our statement of cash flows. Cash flows for acquired franchise contracts are included as investing activities in our statement of cash flows. We evaluate the carrying value of our franchise contracts for indicators of impairment, and, if such indicators exist, we perform an analysis to determine the recoverability of the carrying value of the asset group by comparing the expected undiscounted future cash flows to the net carrying value of the asset group. If the carrying value of the asset group is not recoverable and it exceeds the estimated fair value of the asset group, we recognize an impairment loss in our statement of comprehensive income and member's equity for the amount by which the carrying value exceeds the estimated fair value. We allocate the impairment loss related to the asset group among the various assets within the asset group pro rata based on the relative carrying values of the respective assets.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 97)
What This Means (2025 FDD)
According to Embassy Suites's 2025 Franchise Disclosure Document, franchise contracts are amortized using the straight-line method over their estimated useful lives, which typically range from 10 to 20 years, coinciding with the contract term, including any extension periods at Embassy Suites's sole option. The amortization process starts on the later of either the hotel's opening date or the contract execution date.
Amortization of franchise contract acquisition costs is recognized as a reduction to franchise royalty fees. In contrast, the amortization of costs incurred to obtain franchise contracts is recognized as amortization expense within the statement of comprehensive income and member's equity. For cash flow reporting, both contract acquisition costs and costs to obtain a contract are classified as operating activities. However, cash flows related to acquired franchise contracts are categorized as investing activities.
Embassy Suites evaluates the carrying value of franchise contracts for potential impairment. If indicators of impairment exist, an analysis is performed to determine if the carrying value of the asset group is recoverable by comparing expected undiscounted future cash flows to the net carrying value. Should the carrying value not be recoverable and exceed the estimated fair value, an impairment loss is recognized in the statement of comprehensive income and member's equity. The impairment loss is then allocated proportionally among the assets within the asset group based on their relative carrying values.