When does amortization begin for Embassy Suites By Hilton franchise contracts?
Embassy_Suites_By_Hilton 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 By Hilton's 2025 Franchise Disclosure Document, the amortization of franchise contracts begins on the later of two dates: the opening date of the hotel to which the franchise contract pertains, or the date the contract is executed. Amortization is applied using the straight-line method over the estimated useful life of the contract, which typically spans 10 to 20 years, including any extension periods that are at Embassy Suites By Hilton's sole discretion.
For a prospective Embassy Suites By Hilton franchisee, this means that the amortization of the franchise contract costs, which are capitalized as assets, will not begin until the hotel is open and generating revenue, or until the franchise agreement is signed, whichever occurs later. This is a standard accounting practice that aligns the expense recognition with the period in which the franchise is operational and benefiting from the franchise agreement.
The FDD also mentions that amortization of franchise contract acquisition costs is recognized as a reduction to franchise royalty fees, while amortization of costs to obtain franchise contracts is recognized as amortization expense in the statement of comprehensive income and member's equity. This distinction is important for understanding how these costs impact the franchisee's financial statements and royalty obligations. Furthermore, Embassy Suites By Hilton evaluates the carrying value of franchise contracts for impairment, which could result in an impairment loss if the carrying value is not recoverable.