By Chris Garland
Revenue recognition standards have been converged and are now changing for both IFRS (IFRS 15) and US GAAP (ASC 606-10) beginning in 2018. US GAAP will allow non-public companies to transition beginning in 2019. After receiving input from the HFTP Hotel Advisory Council, the American Hotel & Lodging Association Financial Management Committee recently issued an article published on Hotel News Now on the change to US GAAP:
For HFTP members around the world, here is the bottom line. Revenue recognition is moving from the “Risk and Reward” approach, to recognition at “Transfer of Control.” While there may be a number of areas that impact the hospitality industry, the one which is receiving the most attention is the recognition of Online Travel Agency (OTA) Revenues.
In the OTA merchant model today, the guest pays the OTA which in turn remits payment to the hotel. The hotel records revenue at the net amount. In a simplistic example, under the new rules, because the hotel transfers control to the guest, the OTA revenues would need to be recorded at gross and the difference between the payment from the OTA and the revenue, would be commission expense. This will cause increased revenues and certain associated expenses to increase (management fees, sales tax on the delta etc.). There is an exception permitted under US GAAP and that refers to the fact that if you cannot determine what the customer is being charged for the room in a bundled transaction then you can report it as net. IFRS does not make this same exception.
The standards for both GAAP and IFRS indicate that an entity is a principal (and, therefore, records revenue on a gross basis) if it controls a promised good or service before transferring that good or service to the customer. There should be no doubt, that the hotel controls the guestroom and the service provided to the end user, which makes the hotel the principal in the transaction.
Some of the larger publicly traded hotel companies in the US have prepared documentation for their auditors, outlining their interpretation of the OTA contractual agreements they are in and why they plan to continue reporting as they have in the past. It is important for them because they are publicly traded and because they have significant levels of OTA business.
Even though you may not have the resources of the large brands, it is very important that you review your OTA agreements to determine how to set the transaction price and if you need to report those revenues as gross or net. You may need to decide which OTA model to use for your business, merchant or retail as this could impact your 2018 budget preparation, your operating expenses and your ADR.
Chris Garland, CHAE (email@example.com) is principal consultant at Mission Hospitality Solutions and chair of the HFTP Hospitality Finance Advisory Council. He is also a director on the HFTP Global board and a speaker at the 2017 HFTP Annual Convention (#HFTP65) on October 25-27 at the Omni Orlando Resort at ChampionsGate in Florida.