GLOBAL REPORT—While change can sometimes be difficult and confusing, adoption of the new accounting guidelines spelled out in the recently published 11th edition of the Uniform System of Accounts for the Lodging Industry has been relatively smooth, sources said.
“We’ve received a few questions from the industry, perhaps two or three dozen, but for the most part there haven’t been many issues,” said W. Peter Temling, president of The Temling Group. Temling is a member of the financial management committee of the American Hotel & Lodging Association, which last May completed a two-year review of the accounting standards and published the 11th edition.
Following the release of the new edition, the committee and the AH&LA launched an education program to explain changes to the guidelines. The effort included lectures, webinars, conference calls and a Web resource portal users can access to get more information and ask questions. The new guidelines took effect 1 January.
One goal of the new guidelines was to recognize the increasing globalization of the hotel industry, Temling said.
“Many of the changes are reflective of what’s happening in the world in our industry,” he said. “Chains based in the (United States) have generally adopted the guidelines; that’s not the problem. But we also hope chains domiciled outside this country will accept the changes outlined in the book.”
Some of the changes are small, but symbolic, Temling said. In previous editions of the book, accounting for some employee benefits reflected terminologies used by U.S. companies.
“Up through the 10th edition, we called it FICA or social security for employees’ benefits,” Temling said. “This time around we call it social benefit contribution, which is more universally acceptable.”
Large hotel companies might have more difficulty adopting the new guidelines than will smaller ones, said Michelle Russo, founder and CEO of Hotel Asset Value Enhancement, a hotel asset management and real estate advisory company. She is a member of the financial committee that created the latest edition.
“It’s actually harder for larger operators because they often have many divisions,” she said. Examples she cited affect reporting of telecommunications, labor and segmentation data.
“We created a new (information technology) department, and in a large company that is worldwide that operates on multiple accounting platforms, the mapping process is massive,” she said, adding that some companies have decided to defer adopting the new IT department guideline until 2016.
The new guidelines created more detail in labor cost reporting, which is important for ownership but a daunting task for management, Russo said.
“Previously, the rooms department (category) had one line called ‘Labor’ and 43 lines called other things, and that included printing, stationary, stamps and other stuff,” she said. “While labor is 60% of that department, previously there was no breakdown of housekeeping labor versus front office, etc.”
The management agreement
Some aspects of the new guidelines might affect management company and franchise fees and performance tests for managers, Russo wrote in a recent white paper on the implications of the 11th edition guidelines for management agreements.
“For example, ‘Total Revenue’ is replaced with a term call ‘Operating Revenue,’” Russo wrote. “There is also a new schedule that is reported below (gross operating profit) that includes revenue not generated by the operator (including interest income, other income such as antenna lease income and cost recovery income).”
In a telephone interview, Russo said most management contracts require managers’ reports to owners comply with generally accepted accounting practices and the most-current edition of the Uniform System of Accounts.
“However, the agreement still dictates the relationship, so even if there are changes in the Uniform System of Accounts you must go back to your agreement to determine if those changes affect the management fee,” she said. “If (a management agreement) requires you to comply to the new edition, then you have to comply. There is no compliance police; however, if the operator doesn’t comply, then it is in default of its management contract.”
Resort fees
Another significant but isolated change dictated by the new edition is the accounting of resort fees.
Under the new guidelines, resort fees are recorded as miscellaneous income and shouldn’t be included in the calculation of average daily rate.
Russo said the change shouldn’t affect management fees if management fees are based on total revenues.
“The change will create much better comparisons using (STR) reports,” she said. “Some hotels charge resort fees and some don’t, so it had been very hard to assess the true relative performance of a hotel when compared to a market with a mix of hotels in which some included the resort fee in rooms revenue and some didn’t.”
Brad Garner, senior VP of client relationships for STR, parent company of Hotel News Now, said impact of change in resort fee accounting should be felt mostly on a local level.
“Generally, you’re never going to see a resort fee impact nationally or within the chain scales,” he said. “Those resorts charging a resort fee is such a minute number of properties. Where you’re going to see impact is at the comp set level.”
Garner said STR surveyed a sample of properties charging resort fees to assess their readiness for the changes. While 82% of properties surveyed said they do not include resort fees in rooms revenue or other rooms revenue categories,* 88% said they will be able to comply with the new guidelines and account for resort fees as part of miscellaneous income. And 81% of operators said, if necessary, they will be able to restate their reports to STR to exclude resort fees from rooms revenue.
“This mutes a lot of the concern about resort fees,” Garner said. “We generally don’t know the impact because we don’t have visibility into the room revenue number (hotels are) reporting to us. We just set forth our data guidelines based on USALI and say this is what should go into room revenue. We won’t know the impact until we can look at a before and after if someone has to restate their revenue numbers.”
Correction, 23 January 2015: An earlier version of the story stated 82% of properties surveyed do include resort fees in rooms revenue or other rooms revenue categories.