Hotel management and financial reporting continued; the Uniform System of Accounts for the Lodging Industry (USALI)
This part of the series concentrates on the format and content of the Summary Operating Statement. Hotel accounts prepared by almost all of the major local, national and international chains and many independent properties will have based their reporting on the USALI, and should by now be using the format shown as from the Eleventh Revised Edition published in 2014. For anyone involved in auditing or interpreting USALI hotel accounts, access to the full book is essential to extend your knowledge beyond the content of these articles.
The operating statement summarises the data derived from schedules that cover the various sources of revenues, and direct and indirect costs. As will be shown in subsequent parts of this series, there is a logical split between the profit and cost centres of the hotel, and the application of activity and responsibility accounting principles.
All references are to the current edition of the USALI, that was intend to be adopted from 1 January 2015. There are many hotels and companies that have not updated their reporting to this version. What is important to note is that there have been significant changes in the last two editions (some dating back at least 10 years), and that where hotels are committed to producing their operating accounts in conformity with the Uniform System, they must now use the 11th Revised Edition’s standards.
Key Features of the Summary Operating Statement
The Rooms statistics shown at the top of the schedule are standard performance indicators related solely to the revenues derived from the letting of bedrooms. The USALI defines each of these in detail, so that data from hotels that follow the standards can in theory be compared on a like for like basis. However, when benchmarking or competitive data is being interpreted care must be taken to identify variations in practices and the validity of the comparisons.
The operating statistics that are shown on the Summary Operating Statement are only a small number of those contained in the USALI. A whole section of the book covers many others and provides standard definitions. A strength of the USALI is to make common the terminology and formulas involved. Later articles will explore this section more fully.
Financial reporting elements of the Summary Operating Statement
The line items on the summary statement are, as already mentioned, derived from more detailed supporting schedules. They are a minimum presentation to enable the overall performance of the hotel to be measured. The principles behind the USALI approach to the preparation of operating statements combine accounting for activities, responsibilities and levels of control. Data for the current period and year to date is included, alongside comparisons to budget and prior year.
The most important financial elements of the statement for external users in particular are Total Operating Revenue, Gross Operating Profit, Management Fees and EBITDA (Earnings before Interest, Taxes, Depreciation and Amortisation). The latter being the profit figure from the hotel’s operating statement that can be directly reconciled to its financial accounts. Why these particular lines are so important and how they relate between the operating and financial accounts will be further explained.
Revenue is just four lines, showing the totals of the revenues categorised as:
Rooms includes income from the letting of guest rooms. There is extensive coverage in the USALI of exactly what is included in this category, and how package and inclusive prices are handled. This will be explored in detail.
Food and Beverage includes revenues from restaurants, bars, in-room dining (room service`) and mini bars, banqueting and conferences, meeting and function rooms.
Other Operated Departments examples of which are referred to in the USALI include Health Club/Spa, Golf, Parking, Retail, Business Centre - and Minor Operated Departments such as Vending machines and kiosks, in-room movies, guest communications.
Miscellaneous Income being that arising from indirect sources or not treated by the USALI as from operated departments. Included are rented spaces for gift shops or other guest related service providers, commissions received and cash discounts earned. Others that can be material and that arise from the main operated departments include revenues arising from cancellations made after a contracted cutoff date or time, and where income is received from groups where not all the guaranteed reservations were taken up (called attrition). Also surpluses or deficits from components of a package unused or not charged for (called package breakage) are credited here.
Total Operating Revenue is the result of adding all of the above. This is called Operating Revenue as the latest edition of the USALI introduced a Non-Operating Income category that is shown below the Gross Operating Profit level. The term Total Operating Revenue was introduced in this latest edition of the USALI. Many hotel management agreements, leases, franchise agreements, funding and related legal documents may have definitions of revenue that do not coincide with this version.
Auditing of certifying revenue or profits for a hotel requires an understanding of how and where the Uniform System treats each relevant element. What has been covered so far is just the beginning. The next parts will cover more fully the Summary Operating Statement, before moving into the details of how each revenue and cost line is generated.