A hotel is a high-volume cash business with a fixed asset base. Revenue arrives daily in small amounts through the property management system (PMS), and the largest costs are labor, franchise and management fees, and debt service. Lenders, equity partners, and franchisors require audited statements in many deals.
This guide covers revenue, the franchise and management fee arrangements, the analytics that find errors, and the PBC items to request.
Room revenue and ancillary services
A guest stay is a bundle: the room night, food and beverage, parking, resort fees, spa, and meeting space. The first judgment is which items are distinct performance obligations and which are bundled. Once the policy decision is made, it applies to most similar stays.
Room revenue is a performance obligation satisfied over time: the guest receives and consumes the room each night. A franchisor's public filings describe room revenue from owned and leased hotels as recognized daily as rooms are occupied and services are rendered. Food and beverage and other outlets are recognized when the service is delivered.
Points that need attention:
- Gross versus net. When the hotel sells third-party tours, sells rooms through an online travel agency, or runs outlets for a lessee, decide whether the hotel is principal or agent. See principal versus agent.
- Advance deposits and prepaid packages are contract liabilities until the stay occurs. Deposits for future events and groups belong in deferred revenue, not revenue on receipt.
- Taxes. Occupancy and sales taxes collected from guests are a liability to the taxing authority. Test the tax payable roll-forward and tie it to the filings.
- Cancellation and no-show fees are recognized when the cancellation terms are triggered.
- Resort and destination fees need an evaluation of what the guest receives for the fee.
The night audit and system testing
The PMS posts room charges at night, and the night audit closes the business day. That process is the control to understand and walk through.
Procedures:
- Obtain the daily revenue and statistics report for the year and the monthly summaries. Information produced by the entity needs completeness and accuracy testing.
- Tie the PMS monthly revenue to the general ledger by revenue center and reconcile differences.
- For a sample of days, trace the night audit report to the bank deposits and credit card processor settlements.
- Test rate overrides, comped rooms, and voided or adjusted folios. Voids after checkout are a classic place to hide skimming.
- Test the settlement of city ledger (direct bill) receivables against subsequent cash.
Analytics
Hotel data lends itself to analytical procedures under AU-C 520. Compute average daily rate (ADR), occupancy, and revenue per available room (RevPAR) by month and compare them to prior year, budget, and the competitive set. Revenue should equal rooms available multiplied by occupancy multiplied by ADR. A gap between recomputed room revenue and booked room revenue needs an explanation.
Worked example (illustrative numbers). A 200-room hotel reports 51,100 occupied room nights for the year, which is 70% of 73,000 available nights. ADR is $150. Expected room revenue is 51,100 x $150 = $7,665,000. The general ledger shows $7,790,000. The $125,000 difference could be package revenue allocated to rooms, group billing adjustments, or manual journal entries. The auditor traces it to the cause. If it is journal entries, the entries go to the journal entry test.
If the hotel pays a 5% royalty on room revenue under its franchise agreement, expected royalty expense is $383,250 on the PMS figure. Recompute the expense from the report submitted to the franchisor and reconcile the difference. A franchisor audit of the owner's reported revenue can result in a true-up, which is a liability if probable and estimable.
Franchise fees and franchise costs
For the franchisee, the typical costs are recurring royalties and marketing or reservation fees, usually a percentage of room revenue, plus an initial application fee and a property improvement plan (PIP) required to meet brand standards.
- Recurring fees. Test the monthly calculation to the franchisor statement and to the PMS revenue base. Look for fees accrued at year end that relate to the next period.
- Initial franchise fee. It is usually capitalized and amortized over the franchise term. Test the term to the agreement. See franchise initial fees.
- PIP costs. Distinguish capital improvements from repairs and maintenance, and test placed-in-service dates and depreciation.
- Termination and liquidated damages. If the franchise is ending, read the agreement for termination payments and assess the loss contingency.
- FF&E reserve. If the franchisor or lender requires a reserve of a percentage of revenue, test that deposits agree to the agreement and that the restricted cash is classified correctly.
How the franchisor or manager records its side
When the audit client is a franchisor or manager, the accounting differs. Franchise revenue comes from a license to the brand intellectual property. Ongoing royalties are variable, calculated as a percentage of property revenues, and recognized monthly as they become payable. Initial application and relicensing fees are fixed and recognized on a straight-line basis over the initial or renewal term, according to a large franchisor's SEC filing. That treatment follows from the licensing guidance in ASC 606: a brand is symbolic intellectual property, so the license is a right to access recognized over time, as opposed to functional IP such as software.
Management contracts add base fees and incentive fees. Base fees are a percentage of property revenue and are recognized monthly. Incentive fees tied to profitability are variable consideration recognized only when a significant reversal is not expected. Reimbursed costs of payroll and centralized programs are recognized as incurred, with a gross presentation question.
Loyalty programs
Points that guests earn through stays are a material right under ASC 606 when they give a discount the guest would not otherwise receive. The consideration allocated to the points is deferred and recognized on redemption. If the standalone selling price is not observable, ASC 606 requires an estimate that reflects the discount available and the likelihood of exercise. Breakage is estimated from redemption history. Test the liability roll-forward, the redemption rate, and the funding the hotel owes to the program sponsor.
Red flags
- Revenue per available room above the competitive set without a rate or occupancy explanation.
- Heavy voids, adjustments, or comps by one night auditor or shift.
- Deposits and prepaid package balances that never convert to revenue.
- Franchise fee expense that does not track PMS revenue.
- Repairs and maintenance that jump while capital spending drops during a PIP.
- Occupancy tax payable that grows over the year without payments.
- Manual journal entries to revenue at month end.
- Related party management companies paid above the contract rate.
PBC items to request
- Monthly PMS revenue and statistics reports, and the year-end night audit
- Franchise and management agreements, with amendments and PIP schedules
- Royalty and fee statements submitted to the franchisor
- Group and event contracts with deposit ledgers
- City ledger aging and subsequent collections
- Occupancy and sales tax returns
- Loyalty liability roll-forward
- Fixed asset register with PIP additions
- Bank, credit card processor, and online travel agency statements
- Insurance claims and property tax assessments
- Representation letter
See the PBC list guide and analytical procedures.
Sources
- SEC EDGAR, Marriott International Form 10-K (fiscal 2024) note on revenue recognition for franchise fees, management fees and room revenue, https://www.sec.gov/Archives/edgar/data/1048286/000162828025004818/R11.htm
- PwC Viewpoint, Revenue from contracts with customers guide, 7.4 Unexercised rights (breakage), covering gift card and loyalty breakage: https://viewpoint.pwc.com/dt/us/en/pwc/accounting_guides/revenue_from_contrac/revenue_from_contrac_US/chapter_7_options_to_US/74unexercised_rights_US.html
- AICPA, AU-C Section 520, Analytical Procedures
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AU-C references are to AICPA Professional Standards, paraphrased here; read the standard itself before relying on a requirement. This page is guidance, not professional advice. Report an error