Barter Agreement

Objective :

To ensure that barters are properly accounted for.

Procedure :

1. Approving Barters：

   Barters are to be treated as contracts.

   
   

2. Valuing a Barter  

   a. Prior to inception, the Director of Finance & Business Support must attest that the barter has commercial worth.

   
   

   b. Most barter agreements will be valued and accounted for at face value. However, in certain cases where the face value does not represent the real economic value e.g. where rooms are given by the hotel to an advertising agency at rack rate, which would normally be sold at a discounted rate, the Director of Finance & Business Support will assign a fair value to the barter.

   
   

   c. The principle to be used in determining the fair value is to compare the cost of the benefit received by the hotel, with the cost which the hotel would have otherwise have had to pay in a normal cash transaction.

   
   

   d. The fair value should never be less than 50% of the face value of the benefit the hotel extends. See the below schema for barter treatment on the bottom explanation.

   
   

   e. Considering that the Gross Operating Profit for Rooms is considerably higher than that for F&B, barter for rooms will be more advantageous for the hotel. To put it differently, a barter for rooms is preferable because the hotel can offer a greater value with lesser cost.

   
   

3. Reconciling and Tracking Usage of Barters  

   The Director of Finance & Business Support will reconcile all barters monthly, the reconciliation will be held on file. To ensure barters are utilized, the Director of Finance & Business Support is required to alert management if the benefit to be enjoyed by the hotel is about to expire. Adequate notice should be given to allow effective use of the benefit.

   
   

4. Accounting for Barters 

   a. The principle of barter accounting is to record the economic benefit as revenue when received and record the economic cost when incurred. Both the cost and benefit are to be recorded within the life of the barter agreement.

   
   

   Example: 

   A hotel gives an adverting agency ten room nights in return for ten adverts in a trade publication. The barter is valued at 1,000 units (i.e. 100 units a room and 100 units per advert). On receipt of the signed barter, the Director of Finance & Business Support will set up accounts in the balance sheet thus:

   
   

   Debit.    Deferred Cost 

   Credit：  Deferred  Income   

   
   

   b. The barter runs for Base on contract itself.

   
   

   c. As the rooms are used the deferred income account will be debited and room revenue credited. (Debit. Deferred Income 500 units, Credit: Room Revenue    500 unit). Conversely as the adverts appear, the deferred cost account is credited and the appropriate sales and marketing account debited. (Debit. Adv. Expenses   400 units, Credit: Deferred Cost 400 units)

   
   

   d. At the conclusion of the barter any remaining balance in the deferred income account will, in the first instance, be credited to any remaining balance in the balance sheet deferred cost account (Dr. Deferred Income, Cr. Deferred Cost), if there’s insufficient deferred cost, the residual balance will be credited to the appropriate sales and marketing account (Dr. Deferred Income, Cr. Sales & Marketing Exp. Account). If the converse applies i.e. the hotel has not used the advertising in whole or in part, the deferred cost shall be written off. Write-off procedures shall be complied with hotel regularizes.

   
   

5. Duration of Barter Agreements  

   
   

   a. Barters will not exceed base on contract.

   It is the Director of Finance & Business Support’s responsibility to forewarn management of unused balance in a barter account so as to encourage the use of the benefit extended. 

   
   

   b. If a barter contract expires (without renewal), the unutilized balance in the barter account will be written off in the same manner as other trade receivables, and/or written back i.e. crediting the departmental expense account originally charged.