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Interpreting and Auditing Hotel Accounts in 2016 - Part 5 The Hotel Operating Statement con-tinued

In Part 4, the overall format and content of the USALI Summary Operating Statement and makeup of the Total Operating Revenue was covered.

The categorisation of Revenues and Costs in the USALI is based on a departmental structure.  In this Part, the focus will be on the remainder of the Summary Operating Statement and the principles used for each section. Future Parts will address details of the individual departments and their features.

This departmental structure treats the activities as either:

•   Operated Departments - that include Revenues, Cost of Sales, Labour and Other Expenses

•   Undistributed Expenses - with costs split into Labour and Other Expenses

•   Management Fees

•   Non-Operating Income and Expenses

•   Replacement Reserve

These categories have remained more or less unchanged since the USALI was first published.  The principles include a combination of the responsibilities of the management team, and recognising the activities that comprise the hotel’s profit and cost centres.

After reviewing aspects of Total Revenue, how the other key Operating Statement lines Gross Operating Profit and EBITDA are derived is further explained below. 

Total Operating Revenue

The USALI sets out a detailed analysis of how to determine whether revenues should be recorded as gross or net.  This appears in Part V of the book.  This section of the book also includes how service charges and other supplementary charges are recorded under the USALI. 

It is vital to read this whole section as there may be material differences between GAAP and USALI treatments.  Also, it is this section that refers to topics that may have a material effect on whether there has been compliance with management and franchise agreements, especially  where revenues and profits are stated to be calculated ‘in accordance with the Uniform System’.

Some loosely worded contracts refer to accounts being in compliance with both GAAP and the USALI.

Areas for issues to arise include:

•   How inclusive prices are treated and the revenues allocated

•   The treatment of service and other supplementary charges

•   What non-standard elements are included in the revenues of each operated department

•   The distinction between Operating and Non-Operating revenues

Examples of these will be dealt with in  more detail later.

 The USALI includes a full dictionary of Revenues.

Departmental Expenses

Under the USALI direct costs are allocated to each operated department In the Food and Beverage and Other Operated Departments there is a Cost of Sales.  In all of the Operated Departments there is a Labour Cost and Other Expenses.

On the Summary Operating Statement, the Departmental Expenses for each of the Operating Departments are shown.

Deducting Total Departmental Expenses total from Total Operating Revenue gives the line called Total Departmental Profits.  As will be seen later, this is more of a trading profit as it does not reflect all of the hotel’s administration and overhead costs. 

There is a full dictionary of Expenses, and a schedule of Departmental Payroll Titles, in the USALI book.  Features of each department will be covered later.

Undistributed Operating Expenses

This section picks up the main operating overhead costs that are under management control and involved designated staff.

Each department has a structure of Labour and Other Expenses, and a departmental total.  The USALI conventions for which items go where are covered in the dictionary of Expenses, and schedule of Departmental Payroll Titles. These will also be explored later.

Gross Operating Profit

Deducting the Total Undistributed Expenses from Total Departmental Profits gives the hotel’s Gross Operating Profit (GOP). 

GOP is a key hotel profit measure deemed to be that under the most direct influence of the unit management, and reflecting both profitability and efficiency.  It is also a key figure in relation to management and profit related agreements, and is a widely used measure within the industry.

Management Fees

Where a hotel incurs fees under a third party management agreement, this line reflects the total payable under the applicable terms.  It will not normally apply if the hotel is owned and operated by the same party.

Non-Operating Income and Expenses

This section summarises categories of revenue and expense that are generally outside of the control of the hotel management team, and do not directly result from the operation.

The headings provide for revenue generated other than from the operation itself such as interest, as well as costs such as building and equipment rents, business rates, insurances and other items that will be illustrated later.  It also records ‘owner’s expenses’ that might apply where a management contract is involved, and certain items are deemed not be part of the operating costs.

Earnings Before Interest, Taxes, Depreciation and Amortisation (EBITDA)

This is the one USALI profit line that should reconcile directly with the financial profit of the hotel.

As hinted at above, there may be some rents and interest in the Non-Operating section that need to be adjusted before a direct comparison with financial accounts is possible.  There may also be some adjustments needed to reflect capitalisation and tax treatment issues.

Replacement Reserve

This is an item that will be dealt with in the next Part, together with some discussion about capitalisation policies, deferred costs and depreciation.

Author’s Note

To cover the subject of auditing and interpreting hotel operating accounts, and the impact of the Uniform System, would fill many pages of a book.  Breaking it down into bite sized articles means that the parts can be published sooner. It is hoped to have been able to develop the whole by the end of the year, and to have an easily accessible archive of the parts as published.

References are to the 11th Revised Edition of the Uniform System of Accounts for the Lodging Industry.  This contains a summary of changes from the previous edition.


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