Where are the direct incremental costs, principally consisting of commissions, included on Engel & Volkers' consolidated balance sheets?
Engel_Volkers Franchise · 2025 FDDAnswer from 2025 FDD Document
The direct incremental costs, principally consisting of commissions, are included in "Prepaid commissions" in the accompanying consolidated balance sheets. The direct and incremental costs expected to be recognized over the remaining term of the associated franchise agreements at December 31, 2024, are as follows:
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The Company capitalizes direct and incremental costs, principally consisting of broker commissions associated with the sale of franchises, which are amortized over the term of the related franchise agreement. These commissions are reflected in the accompanying consolidated balance sheets as "Prepaid commissions."
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 88)
What This Means (2025 FDD)
According to Engel & Volkers' 2025 Franchise Disclosure Document, the direct incremental costs, primarily commissions from the sale of franchises, are accounted for as "Prepaid commissions" on the company's consolidated balance sheets. These costs are then amortized over the term of the related franchise agreement.
For a prospective Engel & Volkers franchisee, this accounting practice means that the commissions paid to brokers for selling franchises are not immediately expensed. Instead, they are treated as an asset (prepaid commissions) and gradually recognized as expenses over the life of the franchise agreement. This approach aligns the expense recognition with the period during which Engel & Volkers benefits from the franchise agreement.
This accounting method is a common practice in the franchise industry, as it provides a more accurate representation of the costs associated with acquiring a franchise and matches those costs with the revenue generated over the franchise term. Franchisees should be aware of this accounting treatment, as it affects how Engel & Volkers' financial performance is reported and analyzed.