Changes to Accounting Standards to Impact the Hotel Industry - 0 views
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In order to determine if revenue should be recognized on a “gross” or “net” basis, one needs to understand what flexibility the OTA has to discount the room rate, charge additional fees to a guest, or combine the room night in a package with other goods or services (e.g. flight, rental car) under the Merchant Model.
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One of the changes to the accounting standards is on revenue recognition, specifically how revenues from Online Travel Agents (“OTA”) should be recognized. Currently, there are two models for the treatment of OTA revenues in the hotel industry:
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Retail ModelGuest makes the reservation via the OTA but pays the hotel upon stay. Hotel remits commission to the OTA. Currently, the hotel recognizes revenue at the gross amount of cash collected (i.e. the total room rate), offset by a commission expense to the OTA. Revenue recognized through this model is typically recorded on a “gross” basis.
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Beginning in 2018 the financial accounting standards for hotel business are changing. One of the changes is the way OTAs charge for the rooms. Typically the OTAs operate under two methods the retail model and merchant model. The retail model uses the OTA to reserve the room but the final payment is made to the hotel. The hotel then gives a commission back to the OTA. Under The merchant model the payment is made to the OTA. Then the OTA takes the commission off and sends the remaining payment to the hotel for the price of the room. This comes out as a net transaction. The new standard is saying that the company that controls the transaction for the room has to mark the transaction or sale as a gross transaction. The new model forces the hotels to record the transaction on a gross basis. This can be a big difference for hotels because now they will have to increase the amount of costs and reduce the hotels bottom line.