How does Embassy Suites recognize the consideration received from hotel owners that is classified as contract liabilities?

According to Embassy Suites's 2025 Franchise Disclosure Document, contract liabilities arise from non-refundable advance payments received from hotel owners for various fees like application and initiation fees. These fees are initially reclassified from franchise deposits. Embassy Suites recognizes this consideration as revenue over the term of the related franchise contract. In the company's balance sheet, these contract liabilities are categorized as deferred revenues. This means that while Embassy Suites receives the cash upfront, it doesn't immediately recognize it as earned revenue. Instead, it spreads the recognition out over the life of the agreement with the hotel owner.

For a prospective Embassy Suites franchisee, this accounting practice has implications for understanding the company's financial statements. The initial fees paid to Embassy Suites are not immediately recognized as revenue by the franchisor but are instead recognized incrementally over the contract term. This approach aligns the revenue recognition with the delivery of services and the ongoing franchise relationship.

This method is a standard accounting practice that ensures revenue is recognized when it is earned, providing a more accurate picture of the company's financial performance over time. Franchisees should be aware that the initial fees they pay contribute to the franchisor's deferred revenue, which will be recognized as earned revenue in future periods. This deferred revenue is a key indicator of the franchisor's future revenue stream and financial stability.