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Editor's Note: The USALI is the standard for hotel accounting. Hotel owners, operators, accountants, consultants, analysts, educators, attorneys, lenders, and investors all rely on it as the “common language” for hotel financial statements and statistics. This article that discusses recent guideline changes has been added to the franchise encyclopedia as a resource for lodging owners and staff.
Major Changes of 10th Edition
The Financial Management Committee of the American Hotel and Lodging Association (AH&LA), in conjunction with the Hospitality Financial and Technology Professionals (HFTP), published the tenth edition of the Uniform System of Accounts for the Lodging Industry (USALI) in the fall of 2006. The first edition of the USALI was published in 1926 by the Hotel Association of New York City. The purpose of the first USALI was to establish a uniform responsibility accounting system for the lodging industry.
Changes were made by the AH&LA and HFTP in order to keep pace with the evolving business environment (i.e. condo hotels, internet wholesales, resort fees), as well as provide clarification to ambiguous guidance found in the ninth edition (i.e. allowances, attrition and cancellation fees, definition of available rooms).
For the benefit of lodging industry participants, the Financial Management Committee has prepared the following pages that highlight the major changes found in the tenth edition of the USALI. These first appeared in Lodging magazine and The Bottom-Line. Reprint permission was received from both publications.
AH&LA Financial Management Committee (12/17/07)
To purchase a copy of the tenth edition of the Uniform System of Accounts for the Lodging Industry, please visit the Educational Institute of the AH&LA website at www.ei-ahla.org.
· Group Rooms Revenue is defined as revenue derived from renting blocks of 10 rooms or more.
· Contract Rooms Revenue is defined as revenue derived from a contract with another entity for a consistent block of rooms for an extended period over 30 days.
· Available Rooms is defined as all rooms in the hotel that are used for guest overnight occupancy. The count of available rooms will not be reduced unless a room is out of order for a minimum of six consecutive months due to a non-discretionary event (i.e. fire, hurricane, etc…), or an entire rooms department is completely closed for a minimum of 30 days.
· Complimentary Rooms is defined as a free room provided to a guest often for marketing purposes and not linked to existing contractual relationships (i.e. fourth room night free).
· Group Attrition is recorded in Rentals and Other Income.
· Revenue generated through an intermediary (i.e. wholesaler, dot.com wholesaler) is recorded at the net rate billed to the wholesaler.
· Resort Fees are allocated to other departments based on the value of the components included in the fee.
FOOD AND BEVERAGE DEPARTMENT
· Food and Beverage Department revenues will be combined and shown as one revenue line item on the summary operating statement and the statement of income.
· Food and Beverage Department expenses will be combined and shown as one expense line item on the summary operating statement and the statement of income. Total Food and Beverage Department expenses is the sum of Cost of Sales, Total Payroll and Related Expenses, and Total Other Expenses.
· Separate Food and Beverage departmental sub-schedules are allowed, but the data must be combined on the summary operating statement and the statement of income.
· Departmental Income (Loss) is presented on the Food and Beverage Department schedule, as well as the Food Department sub-schedule and Beverage Department sub-schedule. Department Income (Loss) is not shown on the summary operating statement or statement of income.
· Five classifications of Food and Beverage Revenue are approved: Outlet, In-Room Dining, Banquet/Catering, Mini-Bar, and Other.
· Five classifications of Other Food and Beverage Revenue are approved: Audio Visual, Public Room Rentals, Cover Charges, Service Charges, and Miscellaneous Other Revenue.
· Total Food and Beverage Revenue is defined as the sum of Food and Beverage Revenue net of Allowances and Other Food and Beverage Revenue net of Allowances.
· On the Food and Beverage Department schedule, and each of the Food and Beverage sub-schedules, one Gross Profit number is provided for, and that amount is determined by subtracting from Total Revenue the Total Cost of Sales.
· Cost of sales does not include breakouts for transfers between the Food and Beverage Departments. Such transfers are charged directly to the appropriate cost accounts in the departments receiving the items.
· China, Glassware, Silver, and Linen are separate expense items within the department schedules and sub-schedules, and more extensive definitions of each category are provided.
· An expense line item entitled Complimentary Services and Gifts has been created to capture the cost of gratis presentations for promotional purposes to guests and vendors of the Food and Beverage Department.
· An expense line item entitled Management Fees has been created to capture any amounts paid to a third-party individual or company to operate or manage a food outlet within the property.
· An expense line item entitled Royalty Fees has been created to capture all costs associated with the right to use a brand name in connection with a Food or Beverage Department activity.
OTHER OPERATED DEPARTMENTS AND
RENTALS AND OTHER INCOME
· Guidance is provided to determine when to report revenue on a gross basis (Other Operated Department), or a net basis (Rental and Other Income).
· In order to be classified as an Other Operated Department, the department must have revenue and operating expenses, and is operated with a motivation towards profitability. If not, the activity is reported in Rentals and Other Income.
· If the operation is principally to provide a guest service and as a result revenues are minor or non-existent, it cannot be classified as an Other Operated Department. It should be charged to the department that benefits most from the service. An example would be complimentary shuttle service that would get charged to the rooms department.
· The Telecommunications Department is reported as an Other Operated Department. It is no longer presented as a separate operated department on the Summary Operating Statement.
· Sources of revenue that meet the requirements to be reported on a gross basis, but have limited corresponding expenses (i.e. no labor), are reported as a Minor Operated Department within the Other Operated Department schedule. Examples are movie rental and vending.
· Attrition and cancellation penalties, proceeds from business interruption insurance, and the net proceeds from a third-party laundry and dry cleaning concession have been added as discrete accounts in Rentals and Other Income.
· The sum of revenues from all Other Operated Departments is presented on the Summary Operating Statement as one revenue line item. Similarly, the sum of expenses from all Other Operated Departments is presented as one expense item. These two line items are supported by an Other Operated Department schedule that summarizes the total revenues and total expenses for each individual other operated department.
· A standardized sub-schedule format is provided to report the detailed revenues and expenses for each individual Other Operated Department.
UNDISTRIBUTED OPERATING EXPENSES,
MANAGEMENT FEES, AND FIXED CHARGES
· Security, Human Resources, and Information Systems can be created as departments, but must be summarized and reported on the Administrative and General line on the Summary Operating Statement.
· New categories have been added to the Administrative and General Department for Centralized Accounting Charges and Corporate Office Reimbursables.
· Transportation Expenses directly related to transporting guests are now reported as an expense of the Rooms Department, unless guest transportation is operated as a revenue-generating department and meets the criteria set forth under Other Operated Departments, in which case the cost of guest transportation is shown in Other Operated Departments.
· Franchise fees are included in the Marketing Department. However, the fees paid for licenses other than the hotel brand (such as fees paid for a restaurant or coffee brand) are expensed to the appropriate operating department using the brand in an account named “Royalty Fees.”
· Revenue will not be credited to the Property Operations and Maintenance Department. Instead the revenue must be credited to an operating department. Costs will also be transferred to the operating department. For example, the revenue and expenses associated with the installation of electrical outlets for a trade show exhibition will be reported in the Food and Beverage Department.
· Sewer costs and fees are reported on a separate line item in the Utilities Department.
· Management Fees are a separate line item on the Summary Operating Statement, and reported as a deduction from Gross Operating Profit in arriving at Income Before Fixed Charges. It represents the aggregate amount of both Base and Incentive Management Fees.
· Taxes on Utilities have been moved to the Utilities Department.
· Insurance, which includes property, liability insurance, professional liability, theft and other incidental lines of coverages and the associated deductible costs for each line of insurance is reported under Fixed Charges and includes the costs of uninsured and under-insured losses. Employee related insurance costs for workers compensation coverage is included in Employee Benefits costs in the appropriate departmental schedule. This section also includes the costs of legal settlements and audits which result in changes to the underwriting assumptions used to assess premiums.
Changes to the Balance Sheet were made to reflect changes in GAAP since the release of the ninth edition of the USALI. Two significant changes are:
Due To / Due From
PAYROLL AND RELATED EXPENSES
Within each department that has personnel, payroll and related expenses are divided into two sections: Salaries, Wages, and Bonuses, and Payroll-Related Expenses. The following statements highlight the costs associated with each category.
Salaries, Wages, and Bonuses
The tenth edition contains a Schedule of Department Payroll Titles that lists the titles of positions typically found in the various operated and undistributed departments of a hotel.
RATIOS AND STATISTICS
MIXED-OWNERSHIP LODGING FACILITIES
The Tenth Edition provides guidance for reporting operations derived from projects that include elements where ownership is held by a party other than the hotel owner. These projects include condo hotel operations, timeshare, fractional, and whole ownership elements where the hotel operator may be providing hotel services for the element owners. Due to the diversity of contractual arrangements that exist between owners and operators, the reporting of revenues and expenses will vary depending on the facts and circumstances of each contract. The Tenth Edition provides guidance with respect to determining whether revenues and expenses derived from condo hotel and other mixed ownership situations should be reported in the Rooms Department, Other Operated Departments, or Rental and Other Income. The Tenth Edition does not cover the reporting of results from Time Share operations and Fractional operations, both of which are covered by another publication. The following paragraphs summarize the factors to be considered.
Reported in Rooms Department
Reported in Other Operated Departments
Reported in Rental and Other Income
SUMMARY OPERATING STATEMENT
· The former “Summary Statement of Income” is now entitled “Summary Operating Statement” in order to provide a more operational review of hotel revenues and expenses.
· The Summary Operating Statement is prepared for analytical purposes and is not in accordance with generally accepted accounting principals.
· Account titles have been altered to reflect typical lodging terminology. For example, “Gross Operating Profit” has replaced “Income after Undistributed Operating Expenses.”
· The Summary Operating Statement does not link to Net Income because a deduction is made for replacement reserves. This approach is more informative for the owner or manager who is focused on operating cash flows.
· Due to the difficulties encountered allocating revenues and expenses between the Food and Beverage Departments, all food and beverage revenues and food and beverage expenses are presented in a combined manner on the Summary Operating Statement.
· Telecommunications is now an Other Operated Department.
· Revenue is reported in just four line items: Rooms, Food and Beverage, Other Operated, and Rental and Other Income.
· There are just three matching operating department expense categories: Rooms, Food and Beverage, Other Operated Departments.
· Undistributed expenses are to be assigned to one of four departments: Administrative and General, Sales and Marketing, Property Operations and Maintenance, and Utility Costs.
· Management may create sub-schedules for each operated and undistributed department. However, the revenues and expenses in the sub-schedules must role up into the designated revenue and expense categories listed in the Summary Operating Statement.
· Management fees, inclusive of base and incentive fees, are presented as a discreet expense item.
· Fixed charges consist of Rent, Property and Other Taxes, and Insurance.
· The term “Net Operating Income” replaces “Income Before Interest, Depreciation, Amortization, and Income Taxes.”
· “Adjusted Net Income” is calculated by subtracting a replacement reserve (funded or non-funded) from “Net Operating Income.”
The following table presents the format of the new Summary Operating Statement.
10th Edition USALI Summary Operating Statement
Food and Beverage
Other Operated Departments
Rentals and Other Income
Food and Beverage
Other Operated Departments
Total Departmental Expenses
Total Departmental Income
Undistributed Operating Expenses
Administrative and General
Sales and Marketing
Property Operations and Maintenance
Total Undistributed Expenses
Gross Operating Profit
Income Before Fixed Charges
Property and Other Taxes
Net Operating Income
Less: Replacement Reserves
Adjusted Net Operating Income