Give & take in casino accounting comps
January 23, 2018 3:11 AM
by The Analyst
Three accounting events are impacting gaming operators this year – one expected, two not. The two unexpected ones came from the surprise tax reform act passed in December and the expected one was a change to revenue recognition practices, which will probably ripple into the comp practices of all casinos.
When the tax reform act was finally passed it was much ballyhooed that individual tax rates would go down and people would see more money in their regular paychecks starting sometime around mid-February. The average family can expect somewhere between $50 and $200 more a paycheck.
That extra money will come in handy for most people across the country, but as it is discretionary (uncommitted and free to be spent anyway desired) there is a good chance those households without children will find their way to a casino or two with the extra cash.
Anticipating their customers having a few extra dollars in their pockets, locals oriented regional casinos started revising their marketing programs to anticipate a shot at those extra dollars starting in February.
Then another surprise happened, tax accountants realized that under the accrual basis of tax accounting, any employee bonuses accrued on the books in 2017 and paid by March 15, 2018 could be deducted on the company’s 2017 tax returns.
It has been a longstanding tax accounting rule that a business could accrue expenses in their current tax year as long as those expenses were actually paid by March 15 of the following year. Since the 2017 corporate tax rates are so much higher than for 2018, by taking 2018 expenditures as expenses in 2017 they would save 14 percent on the 2017 tax bill.
So with that tax incentive a number of profitable companies opted to start giving out cash and stock bonuses. Most of the publicly announced amounts are enough to buy new smart phones, the latest HDTV or a nice trip or two to a favorite local or destination casino resort.
There is nothing that warms a casino host and casino marketing professional more than knowing their customers are going to be flush with cash at a particular time.
As good as the accounting news above is, there is some accounting bad news below.
The long expected accounting change mentioned above centers on required changes to standardized practices of revenue recognition across most industries but particularly the casino industry. The changes will dramatically change how comps are recorded in the financial statements of casinos.
In the past comps were recorded as an expense by the department issuing the comp and the department providing the service would record the comp revenue. Simple enough and it did not draw a lot of attention to comps as they were widely perceived as driving gaming revenue, particularly in the financial statements of publicly reporting casino companies.
In the typical set of casino books, casino comps would be expensed in the casino marketing department and for all other departments the comps would be expenses to the authorizing department and revenue to the service providing department. Under the new changes casino comps will now be directly charged to the casino department and accordingly treat comps as a cost of casino operations, simple and succinct.
However, all other departments will be introduced to a new concept of contra-revenue and departmental comp expense will go away. Going forward, if the rooms department gives a comp for a buffet, instead of the rooms department having a comp expense and the buffet department enjoying comp revenue, the rooms department will have no comp expense and the buffet will record comp revenue and then a contra-comp-revenue amount in the revenue category such that there will be no net revenues in the buffet and the buffet has all the expense for providing the comp service to the rooms department.
Those who are not familiar with casino accounting or resort operations may now be wondering so what. The reality is by non-casino comps be treating differently than the past they will now get much more internal and external attention and each non-casino departmental operating manager will now be inclined to scream whenever another department writes a comp for services outside their own department and into another.
So say an executive comps themselves to a lunch in one of the properties better restaurants. The restaurant will not get credit for the comp revenue but suffer the cost of the service, making the restaurant look like it lost money and the department manager look incompetent.
Any time casino owners or senior executives start scrutinizing down turns in departmental bottom lines and comp expenses, all comp policies will get overhauled and probably tightened. Get them while you can!