Accounting for Sales Incentives

The economic recession has had an overwhelming impact on many industries that vie for the consumer dollar, among them the lodging segment of the hospitality industry. With corporate travel cut to a minimum and consumers cutting their discretionary spending on travel, the occupancy levels, as well as average daily rates, decreased dramatically during the recession. Recently, however, occupancy rates have increased, which is driving the growth in revenue per available room. According to Colliers PKF Hospitality Research, “There was a strong surge in lodging demand during the first half of 2010. The sharp rise in demand during the first half of 2010 is partially attributable to the low level of room rates.”

Hotels have benefited from offering various types of monetary incentives to customers, and no doubt they will continue to do so. The most popular and effective tactics that lodging revenue management professionals use to stimulate room occupancy are value-added packages and lower rates. In addition, consumers participating in leisure travel are redeeming loyalty reward program points. The accounting, which can be confusing, differs according to the type of incentive used.

The accounting guidance pertaining to sales incentives is discussed in the Financial Accounting Standards Board’s Accounting Standards Codification (ASC) Topic No. 605-50 (Revenue Recognition/Customer Payments and Incentives). While much of the discussion presented in this guidance refers to software, manufacturing, and retailer discounts and rebates, it also applies to some of the more common incentives used by the lodging industry to induce sales, including:


Coupons and rebates
Discounts on future purchases
Volume discounts resulting in cash rebates
A free night’s stay with the purchase of a certain number of overnight stays
Although the accounting standards do not specifically address these sales incentives in the hospitality industry, using discount coupons is recognized as a reduction of revenue at the time of the sales transaction. The general rule for accounting for coupons and discounts indicates that sales incentives that are offered voluntarily, without charge by a company, may be used by a customer as a result of a single transaction, and will not result in a loss on the sale are recognized at the later of:

The date at which the related revenue is recorded by the vendor, or
The date at which the sales incentive is offered.
Lodging incentives are recognized at the time the services are provided, which means the accounting related to those incentives—value-added packages and lower rates—is generally less complex than that related to the incentives used frequently in restaurants. Hotels may bundle packages for lodging, spa treatments, and food and beverages for one fixed price. The revenue is separated into the various components, and the revenue earned is allocated to the various departments.

In addition, if a hotel is offering a promotional discount in which the guest will receive the fourth night at no charge (after three paid nights), hotels record the revenue for the three paid nights at the negotiated room rate and the fourth night, in this example, at the free amount. Under ASC 605 of the accounting literature, you should recognize the discounted night in the example proportionately throughout the guest’s stay (recognize lower revenue in the first three nights), however, in practice it is not recorded in this manner because of its relative insignificance in any particular monthly reporting period. Also, all of the major hotel property management systems are reporting net revenue consistent with the more practical method of recording zero revenue for the fourth night.

Promotional coupons that offer a designated value for a new restaurant or spa treatment at the hotel upon the next visit are also popular. The accounting treatment for recording these types of incentives is similar to the treatment of incentives commonly used in restaurant operations. Since these promotional coupons are offered voluntarily and without charge, the revenue is reduced by the discount amount at the time the coupon is presented. This treatment assumes that the promotional coupon is not redeemable for cash value, nor will a loss result from the sale.

Companies that issue discounts or coupons that have a cash value or allow a reimbursement are subject to different accounting treatment. Incentives used by franchisors may require that a franchisor or vendor that is providing a form of cash reimbursement to the retailer recognize a liability for the estimate of the dollar amount of discount coupons expected to be used.

When accounting for sales incentives and discounts in the lodging industry, discounts such as “Get the fourth night free after three paid nights” as well as discount coupons on rooms, food, and beverages are recorded as reductions of revenue when redeemed, assuming the sale does not result in a loss. However, incentive programs that have a cash value or allow a reimbursement require the vendor to recognize a liability for the estimate of the dollar amount of discount coupons expected to be redeemed.

Bob Berti is a partner with Crowe Horwath LLP in the Chicago office. He can be reached at 630.574.1620 or


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