Uniform Systems Of Accounts Aids In Revenue Generation

Uniform System of Accounts for the Lodging Industry (11th Edition) Planning for Changes Ronald R. Martinez The Financial Management Committee of the American Hotel & Lodging Association (AH&LA) recently published the Uniform System of Accounts for the Lodging Industry (commonly referred to as the “Uniform System” or “USALI”), Eleventh Revised Edition (11th Edition).

Ronald R. Martinez Supervisor rmartinez@odpkf.com 212.867.8000

The Uniform System is considered to be the guide for hotel owners, managers and other interested parties for reporting and presenting their property’s financial statements. The resulting standardization established by the Uniform Systems of Accounts permits internal and external users of financial statements to compare the financial position and operational performance of a particular property with similar types of properties in the lodging industry.

Due to the standardization provided by the USALI, most, if not all, loan agreements and hotel management contracts contain specific provisions that require hotel owners and operators to prepare their financial statements in conformity with the Uniform System. Changes required by the Uniform System may also affect the basis for management incentive compensation amounts which are based on departmental results. Therefore, it is important that hoteliers become knowledgeable of the changes as soon as possible.

A copy of the 11th Edition may be purchased at click here.

When Is the Effective Date?

Although the 11th Edition is not effective until January 1, 2015, hotel managers and operators should start evaluating the potential impact of the changes required by the 11 th Edition. It is recommended that prior-year results be recast in accordance with the 11 th Edition for comparability purposes. General ledger account numbers or codes will have to be re-mapped or re-grouped in order to produce financial statements in accordance with the 11 th Edition.

As the 2015 budget season fast approaches, we recommend that the changes required by the 11th Edition be incorporated during the budget process for future comparability and consistency purposes. This will save time and effort later.

So What Changed?

The 11th Edition was published to keep up with changes brought by recent updates to generally accepted accounting principles in the United States of

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America (US GAAP), and to International Financial Reporting Standards (IFRS). It also addresses new technology-related items and developments and new terminologies used in the industry.

Some of the significant changes are as follows:

Hotel Operating Revenues The 11 th Edition requires that hotel operating revenues should only consist of revenues that are controlled or directed by hotel operations. In the past, revenues earned from commercial leases — even if not directly associated with the operation of the hotel and not managed or maintained by hotel management — were reported as part of rentals and other income. The 11th Edition requires that such items, which include among others, billboards or cell towers, be recorded as part of Non-Operating Income and Expenses, a line item below Gross Operating Profit, and which was previously referred to as Fixed Charges. The term rentals and other income was also changed to Miscellaneous Income.

Service Charges A service charge is a mandatory amount billed to a guest’s or customer’s account for which the guest or the customer has no discretion as to payment, the amount of the charge, or its distribution to employees.

Service charges must be accounted for as revenue and any corresponding payment of service charge to employees is treated as a wage expense.

Although the previous edition of the Uniform System addressed the accounting for service charges in the Food & Beverage department, it did not address similar or sometimes related charges in other operated departments. The 11th Edition has addressed service charges on each operated department and has included this on all operated departments for consistency.

Information and Telecommunication Systems A new line item referred to as Information and Telecommunication Systems was added, which should include administrative and complimentary phone and internet connectivity costs, and other telecommunications-related expenses. System costs which were previously reported on specific departments should now be reported as part of Information and Telecommunication Systems. Among other various costs, system costs include the cost for point-of-sale reservation systems, accounting and property management system licenses and maintenance, and related fees.

We believe that the changes related to the creation of the Information and Telecommunication Systems line item has the most impact. Careful evaluation and analysis should be made for Information and Telecommunication Systems related costs to ensure compliance with the 11th Edition.

Non-Operating Income and Expenses In addition to moving revenues from billboards, cell towers, etc. into this subsection, the 11th Edition requires owner-directed expenses that are not associated with hotel operations (e.g., asset management fees, receiver fees, owner directed market studies or audits) to be charged to Other, a line item within Non-Operating Income and Expenses.

Gross Versus Net Reporting An entire section in the 11th Edition was added addressing the accounting for certain revenues as either gross or as net. Management must determine whether the hotel is acting as an agent or as a principal and to review various indicators. Some of the indicators which dictate reporting revenues either at gross or at net include agreements between the hotel and the supplier in addition to the standards of service and prices charged to the guest, as well as who assumes the risk of collection.

The determination to report revenue on a net or gross basis further influences the classification of a revenue source as Miscellaneous Income or an Other Operated Department.

Mixed-Ownership Lodging Facilities Over the past few years, existing hotel properties were built or converted into residential units which, in essence, created mixedownership entities. Popular arrangements governing these hotel properties are either timeshares, or rental pool agreements.

The operation of such mixed-used projects does not in and of itself qualify the revenue stream to be recorded in the rooms department.

Management should first consider whether the arrangement should be reported as gross or net. Once the revenue treatment is determined, the party who bears the predominant economic risks and whether it is long- or short-term has to be considered as well. The consideration of such dictates the accounting for the various expenses incurred by the property to rent and service the units, such as labor costs and related expenses and operating expenses.

We Can Help Please contact us if we can assist you in evaluating the changes brought by the 11th Edition. It is not too soon to begin planning for it. *** If you have any questions or would like additional information, please contact Ronald Martinez at RMartinez@odpkf.com or the partner in charge of your account.

NOTE: One of our partners has been a member of the AH&LA Financial Management Committee continuously since the first edition of the Uniform System published in 1937. Partner Henry Freire

currently serves on that committee, following John Baldante who has recently retired.

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