This Issue - Icwai

is known as “Income after Undistributed Operating
Expenses” (vide Ninth Edition of USALI).
(c) Finally, at the third part of the income
statement, fixed charges such as rent, taxes, insurance,
interest, depreciation and amortization charges are
deducted in order to arrive at “Income before Incometaxes”.
As usual, the net income is the amount
available after income tax obligations.
It may be mentioned here that, in most cases,
undistributed operating expenses, combined with
management fees, rent, property taxes, and insurance
comprise the major portion of total expenses for the
period. It is further pointed that hotels have a high
proportion of fixed costs and that about three-quarters
of the total costs are fixed and uncontrollable (Kotas,
1982, 1997)
Exhibit # 1 : USALI Operating Income Statement
Revenue
Rooms X
Food and Beverage X
Other Operating Departments X
Rentals and other Income X
Total Revenue (A) XX
Departmental Expenses
COVER COVER ARTICLE
ARTICLE
Rooms (X)
Food and Beverage (X)
Other Operating Departments (X)
Total Departmental Expenses (B) (XX)
Total Departmental Income (A – B = C) X
Undistributed Operating Expenses
Administrative and General (X)
Sales and Marketing (X)
Property Operations and Maintenance (X)
Utilities (X)
Total Undistributed Expenses (D) (XX)
Gross Operating Profit (C – D = E) X
Managemnt Fees (F) (X)
Income before Fixed Charges (E – F = G) X
Fixed Charges
Rent (X)
Property and Other Taxes (X)
Insurance (X)
Total Fixed Charges (H) (XX)
Net Operating Income ( G – H = I)
Less : Replacement Reserve (J) (X)
Adjusted Net Operating Income (I – J = K) XXX
Source : USALI 10th Revised Edition, 2006
USALI and GAAP
There is no reason to believe that USALI is a
universally accepted method of accounting for the
hospitality industry. There are many countries where
USALI is not followed or the published Annual Reports
does not contain reference to the USALI, e.g. the Annual
Reports of the Taj Hotel Groups. One particular reason
for not following USALI in India is that, under the
Indian Companies Act, 1956, the form and content of
the Income Statement and the Balance Sheet are rather
prescriptive and sector neutral. However, the strength
of USALI lies in the fact that the income statement
prepared under this method is highly adaptable to the
accounting requirements under the GAAP and
Companies Act. Indeed, the purpose of USALI is not
to replace but to supplement GAAP. Besides, as a result
of continuous updating of USALI, it is now more
aligned to the GAAP than ever.
Some changes made in the 9th and 10th Editions
of USALI leading to greater convergence with GAAP
are as below :
(a) Preopening expenses : Preopening expenses
include expenditures for intangible costs incurred
prior to the opening of a hotel property that will
benefit the property in future years. Examples include
the grand-opening party, advertising, and training.
Historically, those expenditures have been recorded
as preopening expenses and reported as an “other
asset” on the balance sheet. Those costs were then
amortized over an intermediate period, such as three
to five years. But to align it with the International
Accounting Standards/national GAAP, those
expenditures cannot be recognized as assets; they are
now required to be recorded as expenses immediately.
(b) China and glassware : In the past the uniform
system recommended that those items be recorded
as “property and equipment” and be written off over
their useful life. Now, these items are required to be
expensed when placed into use.
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