Question
Case 22-4c Upscale Management Co. Upscale Management Co. (the Company) enters into a contract with Second City Hotels (the Customer) to provide hotel management services.
Case 22-4c Upscale Management Co.
Upscale Management Co. (the Company) enters into a contract with Second City Hotels (the Customer) to provide hotel management services. The contract is for a five- year period at a fixed price of $10,000 per day (total transaction price of $18.25 million [$10,000 per day 1,825 days]). The Companys hotel management services include hiring and managing employees, procuring goods and services, and advertising and marketing at one hotel property owned by the Customer.
On a given day, the Company might clean guest rooms, perform marketing efforts to increase occupancy, and operate the concierge desk. The nature of the contract is to provide integrated hotel management services (integrated services) over the term of the contract and not a specific quantity of specified services (e.g., cleaning 100 guest rooms per day). The underlying activities can vary significantly from day to day; however, the daily activities are required to satisfy the Companys obligation to provide the integrated services. Therefore, the integrated services transferred to the customer are substantially the same during each period (i.e., the Customer receives substantially the same benefit each period). I
n March 2020, the World Health Organization declared COVID-19 a global pandemic. The COVID-19 pandemic and related travel restrictions and other containment efforts have had a significant impact on the travel industry. As a result, after providing two years of integrated services (for which the Company recognized $7.3 million in revenue [$10,000 per day 365 days per year 2 years]), because of the economic downturn resulting from the COVID-19 pandemic, the Company agrees to lower the price for the remaining three years of integrated services to $8,000 per day.
The following is additional information related to the contract: At inception, the contract met the criteria in ASC 606-10-25-1 to be accounted for as a contract with a customer.
Each daily increment of service is distinct, meets the criteria for recognizing revenue over time, and has the same method for measuring progress. Therefore, the Company concluded that the series of integrated services satisfy the requirements of ASC 606-10-25-14(b) to be accounted for as a single performance obligation.
The change in the price of the contract is approved by both parties to the contract. There were no other changes to the terms of the contract.
The Company has no history of granting price concessions, and the price concession is not related to the quality of the services transferred.
The Company believes that the Customer has the intent and ability to pay the updated agreed-upon price when it is due.
Required:
1. Read the client case carefully and identify key facts and accounting issues to evaluate.
2 .Research the situation your client faces by using the FASB Accounting Standards Codification. Respond to the issues addressed in the case by your client through research and qualitative analysis. Deliberate the issues with your team and to determine appropriate GAAP. Reference the FASB ASC topics impacting the case analysis. If a related topic in the FASB Codification has multiple criteria that must be considered, list and evaluate each criteria related to the case. If you quote a phrase directly from these resources, include the related reference in parenthesis such as (ASCXXX-XX-XX)
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