How does Embassy Suites recognize amortization of franchise contract acquisition costs?
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' 2025 Franchise Disclosure Document, the company capitalizes consideration paid to incentivize hotel owners to enter into franchise contracts as contract acquisition costs. These costs, along with other incremental costs to obtain franchise contracts, are classified as franchise contracts, net on the balance sheet. During the year ended December 31, 2024, Embassy Suites recorded franchise contract intangible assets related to the acquisition of the Graduate brand. These franchise contracts are amortized using the straight-line method over their estimated useful lives, which typically range from 10 to 20 years, including any extension periods at Embassy Suites' sole option. Amortization begins on the later of the hotel's opening date or the contract execution date.
Specifically, the amortization of franchise contract acquisition costs is recognized as a reduction to franchise royalty fees. In contrast, the amortization of costs to obtain franchise contracts is recognized as amortization expense in the statement of comprehensive income and member's equity. For cash flow reporting, both contract acquisition costs and costs to obtain a contract are included as operating activities in the statement of cash flows, while cash flows for acquired franchise contracts are included as investing activities.
Embassy Suites evaluates the carrying value of its franchise contracts for indicators of impairment. If such indicators exist, an analysis is performed to determine the recoverability of the carrying value by comparing expected undiscounted future cash flows to the net carrying value of the asset group. If the carrying value is not recoverable and exceeds the estimated fair value, Embassy Suites recognizes an impairment loss in the statement of comprehensive income and member's equity. The impairment loss is allocated among the various assets within the asset group pro rata based on their relative carrying values. This comprehensive approach to amortization and impairment assessment ensures that the value of franchise contracts is accurately reflected in Embassy Suites' financial statements.