What is the primary performance obligation of Embassy Suites in connection with franchise contracts?
Embassy_Suites Franchise · 2025 FDDAnswer from 2025 FDD Document
Revenues are primarily derived from franchise contracts with third-party hotel owners. Our primary performance obligation in connection with these franchise contracts is related to IP licenses, which grant the right to access our IP, including brand IP, reservations systems and property management systems. This performance obligation is considered to be a series of distinct services transferred over time, for which we receive variable consideration through our franchise royalty fees. While the underlying activities may vary from day to day, the nature of the commitments are the same each day, and the hotel owner can independently benefit from each day's services. We may also receive fixed consideration in connection with other types of fees, which usually represent an insignificant portion of the transaction price. We allocate the variable fees to the distinct services to which they relate by applying the prescribed variable consideration allocation guidance, and we allocate fixed consideration to the related performance obligations based on their estimated standalone selling prices. The terms of the fees earned under the contracts relate to a specific outcome of providing the services (e.g., hotel room sales) to satisfy the performance obligations. Using time as a measure of progress, we recognize fee revenue in the period earned per the terms of the contracts. We do not estimate revenues expected to be recognized related to our unsatisfied performance obligations for our royalty fees since they are considered sales-based royalty fees recognized as hotel room sales occur in exchange for licenses of our IP over the terms of the franchise contracts. We do not typically include extended payment terms in our contracts with customers.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 97)
What This Means (2025 FDD)
According to Embassy Suites's 2025 Franchise Disclosure Document, the primary performance obligation tied to its franchise contracts involves granting franchisees the right to access Embassy Suites's intellectual property (IP). This includes brand IP, reservation systems, and property management systems.
Embassy Suites considers this performance obligation as a series of distinct services provided over time. In return, Embassy Suites receives variable consideration through franchise royalty fees. Although the specific activities may vary daily, the nature of the commitments remains consistent, allowing the hotel owner to benefit independently from each day's services.
Embassy Suites may also receive fixed consideration through other types of fees, but these usually constitute a small portion of the overall transaction price. The variable fees are allocated to the specific services they relate to, following prescribed guidelines, while fixed consideration is allocated based on estimated standalone selling prices. The fees earned under these contracts are linked to specific outcomes, such as hotel room sales, which satisfy the performance obligations. Fee revenue is recognized in the period it is earned, based on the terms of the contracts, using time as a measure of progress.
Embassy Suites does not estimate revenues from unsatisfied performance obligations for royalty fees, as these are treated as sales-based royalties recognized as hotel room sales occur in exchange for the use of Embassy Suites's IP over the franchise contract term. Extended payment terms are not typically included in their contracts with customers.