Hotel franchise fees

What does a hotel franchisor promise?

A franchisor grants the right to use its brand and system, and keeps supporting it throughout the term: maintaining the brand's reputation, standards and marketing, running reservation channels and the loyalty programme. Because the franchisee expects these activities, which significantly affect the brand, the licence is a right to access the franchisor's intellectual property as it exists throughout the term, satisfied over time. IFRS 15's own illustrative examples treat a franchise licence this way. See hospitality accounting and licences under IFRS 15.

How are royalties and other hotel franchise fees recognised?

Royalties based on the hotel's room revenue are sales-based royalties on a licence of intellectual property, so they are recognised when the hotel earns the room revenue, not estimated in advance. Fees for marketing, reservations and the loyalty programme, also usually a percentage of revenue, are recognised in the same way. Fixed annual fees are recognised evenly over the year. Royalty rates for hotels are often around 4% to 6% of room revenue, with further fees for marketing and systems.

Hotel franchise fees: three years from one hotel

A franchisor signs a 20-year agreement with the owner of a new hotel. The owner pays an initial fee of US$ 100 thousand on signing, a royalty of 5% of room revenue and a marketing and reservations fee of 3% of room revenue. The franchisor concludes that its pre-opening support is not distinct from the licence. Room revenue is 8,000, 8,800 and 9,600 thousand in the first three years.

The royalty and marketing fee follow the hotel's room revenue. The 100 thousand initial fee is a contract liability when received and is released at 5 thousand a year over the 20-year term, because it is part of the price of the licence.

When can an initial fee be recognised earlier?

Only to the extent it pays for a distinct good or service. Pre-opening activities such as site reviews, design approvals and opening support usually help the owner benefit from the licence rather than transferring something of value on their own, so they are not distinct, and the fee is spread over the term. Where a pre-opening service is distinct, such as training that has value without the licence, the part of the fee allocated to it is recognised when the service is provided. See franchise revenue in retail.

How are marketing and reservation funds treated?

Franchisors typically pool marketing fees from all hotels in a marketing fund and decide how to spend it. Where the franchisor controls the spending, it is the principal: it reports the fees as revenue and the marketing costs as expenses. The fees are recognised as the hotels earn revenue, while the spending is expensed as incurred, so the fund can show a surplus or deficit in a period even if it is meant to break even over time. Some franchisors disclose the fund's results separately for this reason.

How are incentives paid to owners treated?

To win hotels, franchisors sometimes pay owners key money or fund part of a renovation. These are consideration payable to a customer: the franchisor recognises an asset and releases it against franchise revenue over the term. A 200 thousand payment on this agreement would reduce revenue by 10 thousand a year. If the hotel leaves the brand early, the unamortised balance is written off, net of any repayment the owner must make. See hotel management agreements.

How does the franchisee account for the fees?

The hotel owner recognises the initial fee as an intangible asset, the franchise right, amortised over the franchise term. Royalties and marketing fees based on revenue are expensed as the revenue is earned, usually in operating costs. Costs of meeting the brand's standards, such as a required renovation, are capitalised as property, plant and equipment where they meet IAS 16. See IAS 38 intangibles.

How does US GAAP differ?

ASC 606 treats franchise licences as symbolic intellectual property, recognised over time, with the same royalty exception. Private company franchisors can use a practical expedient, introduced by ASU 2021-02, to treat certain pre-opening services as distinct from the licence, which lets them recognise part of the initial fee when the hotel opens. ASC 952 adds franchisor-specific disclosure. See hotel loyalty points.

This guide is general information. It is not tax or legal advice for your situation.