IFRS 15 and the Hospitality Industry: Revenue Recognition Guidelines

IFRS 15 and the Hospitality Industry: Revenue Recognition Guidelines

Posted In | Finance | Accounting Software | Revenue Recognition | Restaurants, Hotels & Hospitality

The International Financial Reporting Standard (IFRS) 15 has significantly altered the revenue recognition landscape for many industries, including the hospitality sector. This standard introduced a five-step model for recognizing revenue, impacting the way hotels, restaurants, and travel companies report their financial results. This article aims to shed light on the guidelines provided by IFRS 15 for revenue recognition within the hospitality industry.

 

1. Impact of IFRS 15 on the Hospitality Industry
 

  1. Identifying the Contract with a Customer: In the hospitality industry, a contract may be established when a customer makes a reservation or books a service. Under IFRS 15, businesses must clearly identify these agreements and ensure they meet the criteria set by the standard (i.e., it is probable that the entity will collect the consideration to which it will be entitled in exchange for the goods or services).
     

  2. Identifying Performance Obligations: A performance obligation in the hospitality industry can vary greatly, from providing a hotel room, serving a meal, to arranging a tour. These must be separately identifiable in the contract, and businesses must be able to determine when each performance obligation has been satisfied to recognize the revenue.
     

  3. Determining the Transaction Price: This step involves determining the amount of consideration an entity expects to be entitled to in exchange for fulfilling the performance obligations. For instance, if a hotel offers a package including accommodation, meals, and a tour, the transaction price must be clearly stated and allocable to each performance obligation.
     

  4. Allocating the Transaction Price to the Performance Obligations: Businesses must then allocate the transaction price to each performance obligation based on their standalone selling prices. For instance, a package price might be allocated between room rental, meals, and tours based on what each would be sold for separately.
     

  5. Recognizing Revenue when a Performance Obligation is Satisfied: In the hospitality industry, this typically occurs at a point in time, such as when a hotel room is provided or a meal is served. However, for some services, such as a guided tour spread over multiple days, revenue might be recognized over time.
     

2. Challenges in the Hospitality Industry
 

  1. Bundled Services: Many hospitality businesses offer bundled services, like room and meal packages. Under IFRS 15, these bundles need to be divided into separate performance obligations, which can be complex.
     

  2. Loyalty Programs: Hospitality businesses often run loyalty programs, providing customers with points that can be redeemed for services in the future. Determining when and how to recognize revenue related to loyalty points can be challenging under IFRS 15.
     

  3. Non-refundable Prepayments: Many businesses in the hospitality industry accept non-refundable prepayments. Recognizing revenue from these transactions can be difficult, particularly if services are not provided due to cancellations or no-shows.

 

The implementation of IFRS 15 has ushered in a more uniform and transparent approach to revenue recognition, enhancing comparability across the hospitality industry. However, businesses need to fully understand the standard's requirements and assess their contracts, processes, systems, and controls to ensure accurate reporting. By overcoming the challenges associated with this transition, hospitality entities can ensure compliance with the standard while enhancing their financial reporting quality.