Are You Overpaying Management Fees? Gross vs. Net Reporting and the Impact of Improper Accounting

When reporting gross operating revenue, correct classification of expenses is important. Presenting items gross when they should be net can potentially cause a property to overpay fees, including its property management fees. The classification of these expenses is dependent on certain lodging industry rules and guidelines. If the property is acting as an agent in the transaction, the expenses are net against the corresponding revenue. However, if the property is the principal party in the transaction, the expenses are presented as an expense item within the operating expenses.

Expenses such as parking, audiovisual fees and in-room entertainment are examples of instances in which the property may have billed an amount to a customer and subsequently paid a third-party supplier for those services. At times, contingent on the type and size of the property, these expenses can grow to be significant. This is especially true in hotels that have large conference facilities with outsourced audiovisual services, or those that outsource their parking.

There are several indicators to assess when making this determination. Some of the factors are as follows, as noted in the Uniform System of Accounts for the Lodging Industry, 11th Edition:

Net Revenue Reporting

The supplier, and not the property, has the primary obligation to fulfill the contract.

The amount the property earns is fixed, whether it be a stated amount per customer regardless of the amount billed or a stated percentage of the amount billed to the customer.

Credit/collection risk is with the supplier.

Gross Revenue Reporting

The property has the primary obligation to fulfill the contract.

The property has credit/collection risk.

The property determines the nature, type, characteristics or specifications of the product or services ordered by the customer.

The property has multiple suppliers for a customer-ordered product or service and discretion to select the supplier at the time of the transaction.

The property has reasonable ability to establish the pricing with the customer for the product or service.

The property adds meaningful value or provides significant portion of the services ordered by the customer.

Even after reviewing this list, it still may not be an easy process to determine whether gross or net accounting is appropriate as there may not be a distinct yes or no answer. Professional judgment will need to be used to determine which method is correct, taking all facts and circumstances into account. I would encourage a property that has any third-party suppliers, such as those mentioned above, to go through this analysis for each service provided, and keep the analysis on file. At some point, the management company, or other interested party, may question the accounting for these services, and it is beneficial to show that the decision has been well thought out. Clear and concise documentation is key.

Jennifer P. Hogencamp, CPA, CHAE, manages the Hospitality Industry Group at Blum Shapiro. Hogencamp has more than 15 years of public accounting experience. She provides audit services to clients in hospitality, technology, real estate, manufacturing and distribution industries. In addition, she regularly teaches several continuing professional education courses each year and is certified by HFTP as a Certified Hospitality Account Executive (CHAE).