Many hotels that employ media trade programs use the cash accounting principles contained in the Uniform System of Accounts for the lodging industry. In reality, these rules were never meant to be the principles to exchange empty roomnights to the media for advertising.

A common practice for hotel management companies and hotel chains and their marketing budgets is to expense media trade advertising with rooms at rack rate the same as cash. In fact, this is a rate greater than virtually all cash transactions. No law states it must be this way, but many hotels account for the trade in this manner. If the trade budget is significant, this method of accounting can virtually wipe out a hotel’s advertising and marketing non-payroll budget for the year.

It’s understandable the hospitality industry would like to have uniformity for all cash transactions of expenses and revenues.

However, exchanging room nights, which are a perishable commodity, and charging rack rates to your marketing budget doesn’t make good business sense. You can charge the media full rack rate or even published corporate rate, but at least expense the cost at your average daily rate or the lowest rate available on a given date. The savings to your property by doing it this way is extremely cost effective.

A majority of hotels charge their entire media trade budget for the year as the trade agreement is finalized, even though there is breakage (media trade not used) every year. The average breakage is 23% per year. This holds true for any media selected. The following is how media trade should be calculated:

Example:
A hotel does $200,000 in radio trade (airtime) for the year. The trade offered the radio stations running the airtime is as follows:
65% Rooms—$130,000
25% Food/beverage—$ 50,000
10% Golf —$ 20,000

Assuming the average breakage on the trade is 23%, on a $200,000 trade $46,000 of the trade would never be used. So when you factor in the breakage, the trade would be more like:
Rooms—$100,100
Food/beverage—$38,500
Golf—$15,400
Actual trade total—$154,000

At minimum, the hotel accounting should recognize the breakage at the end of the contract and credit the value back to the sales and marketing budget.

If the hotel is a four-star property, and the average cost basis for rooms is 23%, food/beverage is 55% and golf is 0%. When you take the $154,000 in trade the cost would be:
Rooms—$23,023
Food/beverage—$21,175
Golf—$ 0
Actual Total Cost- $44,198

Total hard cost for $200,000 in radio time is $44,198, or 22% of the $200,000. (It’s important to remember the hotel is charging the barter full rack rate or at minimum corporate rate for the rooms against the value of the trade agreement. If a hotel has a management agreement with an outside firm to run the golf course, there may be some cost factors charged back to the property.)

A media trade roomnight at full rack rate or even corporate rate isn’t a fair market value. This is because there are blackout dates or occupancy-related restrictions, when the media trade client can’t use their trade at your property. There is also an expiration date when the contract ends with the media. Additionally, the media trade can’t be booked through a travel company. This means even though there may be a rate package or special advertised or offered on the Internet for your property, the media trade client is still paying the high rack rate or at minimum corporate rate. Finally, when using the trade, the media trade client can’t negotiate a room rate like a cash customer can because the rack rate or corporate rate is established on the media trade contract for media and cannot be changed during the length of the agreement.

Also, most hotels neglect to consider revenue from trade that is redeemed. In other words, the marketing expense for the trade is offset by income from rooms, food/beverage and/or golf, spa.

There is so much lack of clarity concerning the accounting on media trade programs that most hotel controllers, both on a local and corporate level, simply find it easier to discourage their properties from conducting media trade programs. The biggest reason is that education is lacking on the subject and hoteliers don’t know how to handle the bookkeeping associated with the trade. If they did, they could bring additional savings to the property owners and leverage a lot more money for their advertising and marketing budgets.

A preferable method for accounting for barter advertising is to charge the media as an expense against the barter liability when the media is used. Further, the hotel should recognize the use by their barter client as their client uses their portion of the hotel credits. Or if the hotel must recognize the cost to the marketing budget at the time the media is used, then it should be charged at the anticipated cost (not full rack), and at the end of the contract any breakage should be credited back to the marketing budget.

The Internal Revenue Service’s Hotel Industry Overview of August 2007 Accounting Principles states the following: “A barter transaction occurs when a property agrees to provide accommodation and/or other services in exchange for external services, for example advertising. While USALI recognizes barter transactions as executory contracts that do not need to be recorded in the financial statements until service is provided or received, it suggests that to provide more complete information for decision-making, the internal records reflect the transaction by recording an asset and a liability at the time the barter transaction is negotiated. The value assigned to this transaction should be a conservative average of the market rate for similar accommodations or services at the property, per the USALI.

When services are provided by the property, revenues are recorded and charged to the barter liability. On the other side, the expense is offset against the barter asset account when the service is received. For external reporting purposes, USAL suggests the asset and liability accounts be netted and reflected as a current asset or liability. This will result in revenues and expenses associated with the barter transaction being reported in different periods.”

During the current tough economic climate, many four- and five-star properties find themselves in default. One solution would be to use media trade programs, using the empty room nights to gain new cash customers from the advertising. Since roomnights are a perishable product, if a room goes unused for a night, the hotel will never see income from that unused room. Media trade offers an advantage in filling empty rooms. Additionally, people using the trade bring ancillary revenue to feed the profit centers you offer.

At the same time, you’re helping the cash flow by bookkeeping a media trade program by expensing it at a conservative market rate, while charging the media a rack or corporate rate. By not doing this, accounting departments are taking away a competitive edge from their marketing departments.

Phil Goodman is president and CEO of Western Media Corporation, a Carlsbad, CA-based hotel marketing firm with 36 years experience in providing specialized media trade programs for four- and five-star properties exclusively. He can be reached at phil@westernmedia.biz or 760-476-3727.