Interpreting and Auditing Hotel Accounts in 2016 - Part 6

The Hotel Operating Statement Financial Accounting Issues

Interpreting and Auditing Hotel Accounts in 2016 - Part 6 The Hotel Operating Statement

Financial Accounting Issues

The USALI is principally a management accounting  structure.  This means that allocations of revenues and costs may not accord with relevant financial reporting standards or those necessary for taxation computations.

Here are some of the areas where issues can arise:

Total Revenue

The latest edition of the USALI introduced the distinction between Operating and Non-Operating revenues.  This was to separate out income not generated by the operator or manager, such as interest, retail space or other rentals not associated with the hotel operation.  The total of these forms a credit under the section of the Summary Operating Statement titles Non-Operating Income and Expenses.

The overall Total Revenue for a hotel may therefore require adding both of these lines together. 

The USALI book contains a section Gross versus Net Reporting, and sets out US and generally applied principles. External users need to confirm how those standards have been applied.

When considering how a hotel’s accounts reflect local standards and compliance with management or franchise agreements, one key area to consider relates to the treatment of service charges.  This subject is covered in the USALI in the same section, and in the latest edition for the first time it has been recognised that these charges can apply to all types of hotel revenue.

There are no UK hospitality industry standards for whether service charges have been applied and if so at what rates to which revenues - and whether and with whom they are shared.  It is essential to check whether these charges have been applied and how they have been treated in the revenues and costs within the hotel accounts under review.

The next part of this series will include aspects of this subject that require an understanding when advising on or interpreting hotel accounts.

Earnings Before Interest Taxation and Amortisation (EBITDA)

This should one the key line that enables the hotel’s profit per the Summary Operating Statement  to be reconciled with the same line in the financial accounts.

Before that can be done, and assuming that there are no inconsistencies in the revenue and expense lines down to Gross Operating Profit, the remaining lines might need to be examined as follows:

Management Fees - to ensure they have been calculated in accordance with the relevant agreement if payable to a third party.  Often, this comprises a percentage of revenues and a percentage of profit.  Care must be taken to ensure that the revenues for the fee calculation have been correctly reflected (such as allocations where differential rates apply by department; treatment of service charges), and the provisions as to the defined profit share have been applied correctly.  These checks may involve having to analyse the Summary Operating Statement in more detail.

Almost certainly, any management agreement that was drafted before 2015 will have definitions that differ from those in the current version of the USALI.  Terminology will have changed and significant figures such as Total Revenue and Gross Operating Profit may no longer reflect what the parties intended when the agreement was signed.  It is vital to compare the definitions carefully, and to isolate points of difference.  Many such agreements have out of date wording and proformas.

Rent -  this has grown into a line that encompasses property and equipment rentals, and where operators like to move as many charges as possible to below the Gross Operating profit line.  Apart from land and buildings, included are IT, vehicles, audiovisual and office equipment operating leases.  With the developing accounting standards for recognising certain leases as finance and others as operating, the USALI does not make this distinction.  Users must therefore look closely at this item.  It might have better for the USALI to have an EBITDAR line before rents that are considered finance related.

Property and Other Taxes - all of the revenue and expense figures on the Summary Operating Statement will be exclusive of value added tax.  In the UK, there are currently no other sales or tourist taxes involved.

The main constituent will be business rates, and the USALI allocates any costs related to appeals to this line. 

Note that the costs of the Climate Change Levy have been generally accepted by the USALI as being part of Utilities expense.

Insurance - insurances relating to the building, contents, and public and general liabilities are allocated here.  Included are professional liabilities, loss of licence, fidelity cover, vehicles, cyber and theft cover.   These costs are a mix of both operational and ownership insurance coverage - and there may be provisions in third party agreements that distinguish between the treatments of these.  Costs related to deductibles or self insured elements are also allocated here.

Other - this allows for a range of items not covered elsewhere.  The categories will be Gains or Losses on Disposals of Fixed Assets, and expenses categorised as Owner’s that are determined not be associated with the operation of the hotel such as asset manager fees,owner directed audits and the like. 

The USALI also mentions Foreign Exchange Gains or Losses relating to period end balance sheet valuations.  These are more likely to be financial reporting issues.

The next part of this series will capitalisation issues and the nature of the line item Replacement Reserve, as well as focusing on Service Charges.