Hotel impairment

Why is each hotel usually a cash-generating unit?

A cash-generating unit is the smallest group of assets that generates cash inflows largely independent of other assets. A hotel sells rooms, food and events to its own guests, so its inflows are largely independent of the group's other hotels, even where they share a brand, a reservation system and a loyalty programme. Shared central assets and goodwill are tested at higher levels. Hotels in the same city managed as one business with shared pricing can occasionally form a single unit, but that needs evidence. See cash-generating units and hospitality accounting.

What indicates that a hotel may be impaired?

Common indications include revenue per available room (RevPAR) below budget for a sustained period, a new competing hotel nearby, operating losses, a fall in hotel transaction prices or a rise in market capitalisation rates, higher interest rates, damage or a planned closure. When any is present, the hotel is tested. Hotels carried under the revaluation model are also tested, although if fair value is current and costs of disposal are small, an impairment is unlikely to be material.

Hotel impairment: a city hotel facing new competition

A company owns a city hotel carried at US$ 60 million: land 15 million, building 35 million and furniture, fixtures and equipment 10 million. A larger hotel has opened nearby, and next year's forecast shows revenue of 20 million and EBITDA of 4.0 million. The hotel must set aside 4% of revenue, 0.8 million, each year to replace furniture and equipment, so its cash flow is 3.2 million, expected to grow at 2% a year.

The recoverable amount is fair value less costs of disposal, 52.3 million, because investors in hotels accept a lower yield than the company's own discount rate implies. The loss of 7.7 million is allocated to the hotel's assets in proportion to their carrying amounts, but not below any asset's own fair value less costs of disposal. The land is worth more than its carrying amount, so it takes none of the loss: the building is reduced by 6.0 million and the furniture and equipment by 1.7 million.

What goes into a hotel's value in use?

Value in use is based on the hotel in its current condition. The cash flows include the replacement spending needed to maintain the hotel's standard, which is why the FF&E reserve is deducted, but not planned upgrades or extensions that would increase its performance. Forecasts beyond five years use a steady growth rate. Management fees are deducted where a third party manages the hotel. Lease payments for a leased hotel are excluded from the cash flows and the lease liability is excluded from the carrying amount, so that the right-of-use asset is tested alongside the other assets. See value in use.

How do asset-light groups test management and franchise contracts?

Groups that manage or franchise hotels owned by others hold intangible assets for management and franchise contracts acquired in business combinations, and assets for key money paid to owners. These are tested when the hotels they relate to underperform or an owner is likely to end the contract, using the fees the contract is expected to earn. Goodwill from acquiring hotel brands is tested annually at the level of the groups of units that benefit, often a region. See hotel management agreements.

Can a hotel impairment be reversed?

Yes, under IFRS, if the estimates used to measure the recoverable amount change, for example the competing hotel closes or trading recovers strongly. The reversal is limited to the carrying amount the assets would have had, after depreciation, without the impairment. For hotels under the revaluation model, an impairment is first set against any revaluation surplus for that hotel in other comprehensive income. See reversing impairment losses.

How does US GAAP differ?

Under ASC 360, a hotel held and used is first tested for recoverability by comparing its carrying amount with the undiscounted cash flows expected from its use and eventual disposal. Only if those undiscounted cash flows are lower is an impairment measured, as the excess of carrying amount over fair value. Because undiscounted cash flows over a hotel's remaining life are large, the hotel in the example, with cash flows of 3.2 million a year, would probably pass the recoverability test and record no impairment under US GAAP. Impairments cannot be reversed. See ASC 360 impairment and hotel property and depreciation.

This guide is general information. It is not tax or legal advice for your situation.