Furniture bought by hotel operator is usually adjusted against Furniture, Fixture and Equipment Reserve, well known reserve of hotel industry.
My question is that who will be entitle to show these furniture items in his balance sheet and responsible for charging depreciation.
Hotel operator or hotel owner?
Thanks for the guidance!
Difference between hotel owner and hotel operator accounting
Re: Difference between hotel owner and hotel operator accounting
What is this "Furniture, Fixture and Equipment Reserve"? Is it a part of equity? it sounds suspicious:)
who pays for the furniture, decides which one to buy and when to replace it?
who pays for the furniture, decides which one to buy and when to replace it?
Re: Difference between hotel owner and hotel operator accounting
Replacement Reserve
Reference is often made to the existence in management contracts and loan agreements of provisions for reserves to be set aside for future replacements of furniture, fixtures and equipment, and building systems replacements.
Such reserves are commonly based on a percentage of the hotel's revenues. In some cases, the reserve represents a funding charge into an account from which actual expenditure is carried out. In others, it is a memorandum allocation only.
Unusually, the Replacement Reserve is a charge in the current operating period for future expenditure. It is not a reflection of depreciation, that is a charge only relevant to the financial accounts.
Whether such a reserve exists, at what level, and how the reserve balance movements are controlled should all be covered the owner/operator/loan agreements. Care is needed to ensure that the relevant criteria have been followed, especially in respect of the actual expenditure charged against the reserve balance.
For the operator the existence of the reserve serves to give comfort that funds will be available when required to maintain the physical standards of the hotel, and for the owner that the operator has the resources available to maintain the standards of the property. In practice, there can be disputes about the level of the reserve fund and the nature and speed of the expenditure charged against it. Commonly, between 3 and 5 percent of total annual revenue is credited to the reserve. Refurbishment expenditure against the reserve tends to even out over a five year period. The funding in advance of the reserve can be a significant strain on the net cash flow of the hotel.
Reference is often made to the existence in management contracts and loan agreements of provisions for reserves to be set aside for future replacements of furniture, fixtures and equipment, and building systems replacements.
Such reserves are commonly based on a percentage of the hotel's revenues. In some cases, the reserve represents a funding charge into an account from which actual expenditure is carried out. In others, it is a memorandum allocation only.
Unusually, the Replacement Reserve is a charge in the current operating period for future expenditure. It is not a reflection of depreciation, that is a charge only relevant to the financial accounts.
Whether such a reserve exists, at what level, and how the reserve balance movements are controlled should all be covered the owner/operator/loan agreements. Care is needed to ensure that the relevant criteria have been followed, especially in respect of the actual expenditure charged against the reserve balance.
For the operator the existence of the reserve serves to give comfort that funds will be available when required to maintain the physical standards of the hotel, and for the owner that the operator has the resources available to maintain the standards of the property. In practice, there can be disputes about the level of the reserve fund and the nature and speed of the expenditure charged against it. Commonly, between 3 and 5 percent of total annual revenue is credited to the reserve. Refurbishment expenditure against the reserve tends to even out over a five year period. The funding in advance of the reserve can be a significant strain on the net cash flow of the hotel.
Re: Difference between hotel owner and hotel operator accounting
OK, so such a reserve should not exist under IFRS
Re: Difference between hotel owner and hotel operator accounting
Thanks for your expert opinion. God bless you always Sir!