Revenue Recognition in Tourism and Hospitality

Revenue Recognition in Tourism and Hospitality

• Revenue recognition is the process of recording income when a business provides a service to a customer.
• It is not necessarily recorded when payment is received.
• In tourism and hospitality, revenue is recognized when the guest has stayed, the flight has taken off, or the tour has been completed.

Importance of Revenue Recognition

• Ensures businesses report their income fairly and honestly.
• Helps businesses track performance correctly.
• Follows international accounting standards.

The Journey of Revenue Recognition

• Customer books a service (e.g., hotel, flight, event, or tour)
• Payment is collected (could be in advance or at check-in)
• The service is delivered
• Revenue is recognized once the service is completed.
• Adjustments and refunds are applied when applicable.

Key Principles of Revenue Recognition

• Revenue is recognized when a service is performed.
• A hotel records revenue when the guest completes their stay, not when they book the room.
• Advance payments are recorded as liabilities until the service is delivered.
• When a customer books a tour package and pays in advance, the travel agency records it as "unearned revenue" until the tour happens.
• Revenue is recognized for partial services provided if a customer checks out of a hotel early, the hotel recognizes revenue for the days stayed.
• Refunds and cancellations affect revenue recognition.
• If a guest cancels a prepaid booking, the hotel cannot recognize the revenue.

Real-World Cases: Hotels & Resorts

• Revenue from room bookings is recorded "only after the guest stays".
• Revenue from services like spa treatments or dining is recorded once the guest uses the service.
• The Ritz-Carlton Riyadh follows revenue recognition principles by only recording revenue from bookings after guests complete their stay.
• Hotels under the Saudi Tourism Authority follow similar regulations.

Real-World Cases: Airlines

• When a passenger books a flight, the airline holds the payment as unearned revenue.
• Revenue is it recognized only after the flight is completed.
• Saudia Airlines records revenue only when a passenger completes their flight.
• If a ticket is canceled, it remains unearned revenue or is refunded.

Real-World Cases: Travel Agencies & Tour Operators

• Tour payments received in advance are unearned revenue.
• Revenue is recognized when the tour takes place.
• The "Spirit of Saudi Arabia" initiative by the Saudi Tourism Authority offers prepaid travel packages, with revenue recognized only after the tours are conducted.

Challenges in Revenue Recognition

• Cancellations & no-shows: Some businesses charge a cancellation fee, which can be recognized as revenue.
• Loyalty programs & discounts: Points and discounts affect how and when revenue is recorded.
• Online bookings & digital payments: Businesses must track when the service is delivered, not just when payment is made.

Scenarios and Revenue Recognition:

• Hotel Booking with Prepayment: The hotel recognizes revenue only after the guest stays in the room, not at the time of payment.
• Airline Ticket Purchase: The airline recognizes revenue only after the flight takes off. Then, the payment is recorded as "unearned revenue".
• Tour Package Reservation: The travel agency recognizes revenue when the tour is completed.
• Restaurant Prepaid Reservation: The restaurant recognizes revenue when the customer dines at the restaurant.
• Cruise Ticket Sale: The cruise company recognizes revenue when the cruise departs and services are provided.
• Hotel Loyalty Program: The hotel recognizes revenue when the guest uses the loyalty points for a stay.
• Event Hall Booking: The hotel recognizes revenue only after the event takes place.
• Travel Insurance Purchase: The travel agency recognizes revenue gradually over the insurance coverage period since it provides continuous service.
• Monthly Subscription for a Travel Service: The company recognizes revenue over the month as the service is provided, not at the moment of payment.
• Last-Minute Walk-in Hotel Guest: The hotel recognizes revenue immediately upon the guest's check-in and stay since the service is provided at the same time as the payment.

Explore revenue recognition in tourism and hospitality, focusing on recording income when services are provided. Understand its importance for fair reporting, performance tracking, and adherence to international accounting standards. Learn when revenue is recognized, such as after a hotel stay or tour completion.