How does Embassy Suites By Hilton amortize 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 the 2025 Embassy Suites By Hilton 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. These franchise contracts are then amortized using the straight-line method over their estimated useful lives, which typically aligns with the contract term, generally including any extension periods that are at Embassy Suites By Hilton's sole option. These contract terms usually range from 10 to 20 years.
The amortization process for Embassy Suites By Hilton begins on the later of either the hotel's opening date or the contract execution date. The amortization of franchise contract acquisition costs is recognized as a reduction to franchise royalty fees. Conversely, 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 prospective Embassy Suites By Hilton franchisees, this means that the initial costs associated with acquiring the franchise contract are not immediately expensed but are instead spread out over the life of the contract. This can impact the franchisee's financial statements, particularly in terms of how royalty fees are reported and the overall amortization expense recognized each year. Additionally, Embassy Suites By Hilton evaluates the carrying value of franchise contracts for impairment indicators, which could lead to the recognition of an impairment loss if the carrying value is deemed unrecoverable.