Hotels advised to capitalise income

February 1994
Accountancy;Feb1994, Vol. 113 Issue 1206, p96
Trade Publication
The article presents information on the British Association of Hotel Accountants' (BAHA) report, entitled Recommended Practice for the Valuation of Hotels. The report says that with exception of some smaller ones, hotels should be valued by reference to their current performance and future trading potential, by converting or expressing an estimate of projected net cash flows as a capital sum. This is known as the income capitalisation approach; it anticipates the benefits that will accrue through the ownership of a property and converts these benefits into an estimate of value. The preferred technique is the discounted cash flow approach, which capitalises a future series of cash flows through the application of a discounted rate. The other method, the earnings multiple approach, applies a multiplier to the maintainable earning the valuer has determined for a hotel. The BAHA prefers the discounted cash flow method because it is more responsive to the dynamic of future earnings over time, changes in market conditions, required maintenance or capital expenditure, residual value etc. At a time when few hotels have been sold, the establishment of an acceptable basis for hotel valuation would do much to make hotel company accounts more valuable and facilitate comparisons.


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