Financial Information

 
Accounting for the Loyalty Program

Description of the Matter

During 2020 the Company recognized $1,118 million of revenues previously deferred as of December 31, 2019 and had deferred revenue of $6,271 million as of December 31, 2020 associated with the Marriott Bonvoy guest loyalty program (the “Loyalty Program”). As discussed in Note 2 to the financial statements, the Company recognizes revenue for performance obligations relating to Loyalty Program points and free night certificates as they are redeemed and the related performance obligations are satisfied. The Company recognizes a portion of revenue for the Licensed IP performance obligation under the sales-based royalty criteria, with the remaining portion recognized on a straight-line basis over the contract term. Revenue is recognized utilizing complex models based upon the estimated standalone selling price per point and per free night certificate, which includes judgment in making the estimates of variable consideration and breakage of points.

Auditing Loyalty Program results is complex due to: (1) the complexity of models and high volume of data used to monitor and account for Loyalty Program results, (2) the complexity in accounting for the amendments to the Company’s co-brand credit card agreements during May 2020, as well as the judgment in estimating the relative standalone selling price of the related performance obligations, (3) the complexity and judgment of estimating the standalone selling price per Loyalty Program point, including both the estimate of variable consideration under the Company’s co-brand credit card agreements which has significant estimation uncertainty associated with projecting future cardholder spending and redemption activity, and the estimated breakage of Loyalty Program points which requires the use of specialists and (4) the material weakness in the Company’s internal control over financial reporting that existed for a portion of the year relating to the insufficient complement of resources, including IT and accounting processes and personnel, to perform the ongoing accounting associated with the Loyalty Program.

How We Addressed the Matter in Our Audit

We obtained an understanding, evaluated the design and tested the operating effectiveness of certain controls over the Company’s process of accounting for the Loyalty Program. For example, we tested controls over the accounting methods and model used in reporting results of the Loyalty Program, management’s review of the assumptions and data inputs utilized in estimating the standalone selling price per Loyalty Program point, as well as the development of the estimated breakage.

To test the recognition of revenues and costs associated with the Loyalty Program, we performed audit procedures that included, among others, testing the clerical accuracy and consistency with US GAAP of the accounting model developed by the Company to recognize revenue and costs associated with the Loyalty Program, and testing significant inputs into the accounting model, including the estimated standalone selling price and recognition of points earned and redeemed during the period. Because of the material weakness that was present for a portion of the year, we expanded our sample sizes selected for substantive testing and performed additional testing over the completeness and accuracy of Loyalty Program data during the portion of the year in which the material weakness was present. We involved our valuation specialists to assist in our testing procedures with respect to the estimate of relative standalone selling price of the performance obligations associated with the amendment to the co-brand credit card agreements in May 2020. We involved our actuarial professionals to assist in our testing procedures with respect to the estimate of the breakage of Loyalty Program points. We evaluated management’s methodology for estimating the breakage of Loyalty Program points, and we tested underlying data and actuarial assumptions used in estimating the breakage. We evaluated the reasonableness of management’s assumptions, including projections of cash flows, used to estimate variable consideration under the Company’s co-brand credit cards.

 
Accounting for General & Administrative Expenses and Reimbursed Expenses

Description of the Matter

During 2020 the Company recognized $762 million of general and administrative expenses and $8,435 million of reimbursed expenses. As discussed in Note 2 to the financial statements, the Company incurs certain expenses that are for the benefit of, and reimbursable from, hotel owners and franchisees. Such amounts are recorded in the period in which the expense is incurred and include judgment with respect to the allocation of certain costs between general & administrative expenses, which are non-reimbursable, and reimbursed expenses.

Auditing the classification of general and administrative expenses and reimbursed expenses is complex due to: (1) judgment associated with testing management’s conclusions regarding the allocation of costs between reimbursable and non-reimbursable expenses, (2) the complexity associated with allocating above-property expenses to hotel owners and franchisees due to the high volume of data used to monitor and account for reimbursed expenses and (3) incentives within management’s compensation structure designed to limit the growth in general and administrative expenses.

How We Addressed the Matter in Our Audit

We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s process of accounting for reimbursed expenses, general and administrative expenses, and the process for allocating expenses. For example, we tested management’s controls over the review of the allocation of certain costs to determine if they were reasonably classified.

To test the recognition of reimbursed expenses for appropriate classification, we performed audit procedures that included, among others, (1) testing a sample of transactions that were classified within reimbursed expenses in order to evaluate the appropriate accounting treatment and financial statement classification pursuant to the terms of the management and franchise agreements, (2) performed analytical procedures over total reimbursed expenses and general and administrative expenses in order to identify any trends or indicators of material errors in the classification of expenses, (3) tested manual journal entries made to reimbursed expenses and general and administrative expenses and (4) evaluated the methodology of cost allocations, including any material changes to allocations during the period.

 
Accounting for Indefinite-lived Brand Intangible Assets

Description of the Matter

At December 31, 2020 the Company had $5,995 million of indefinite-lived intangible brand assets. As discussed in Note 1 to the financial statements, the novel coronavirus (“COVID-19”) pandemic created uncertainty and increased subjectivity with respect to the development of estimates of future business performance. Further, as discussed in Note 2 to the financial statements, the Company evaluates the carrying value of its indefinite-lived brand intangible assets for impairment annually, or more frequently when factors indicate that the Company may not be able to recover the carrying value. The Company may first assess qualitative factors to determine whether it is more likely than not that the fair value of the indefinite-lived brand intangible assets are less than the carrying amount. However, when potential indicators of impairment exist, such as in consideration of the impact of COVID-19 on operations, the Company performs an analysis to determine the recoverability of the asset by comparing the estimated fair value to the carrying value of the asset.

Auditing the accounting for indefinite-lived brand intangible assets is complex and judgmental as a result of the subjectivity in estimating the fair value of the indefinite-lived brand intangible assets. In particular, the fair value estimates are developed using the income approach and are subject to significant assumptions such as revenue growth, royalty rates and discount rates. These assumptions may be affected by the impact of the COVID-19 pandemic on future market conditions, including the duration of the recovery period.

How We Addressed the Matter in Our Audit

We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s process of accounting for indefinite-lived brand intangible assets. For example, we tested management’s controls over the review of the significant assumptions used in estimating the fair value of indefinite-lived intangible assets.

To test the fair value of the indefinite-lived brand intangible assets our procedures included, among others, assessing the methodologies used in evaluating brand assets for impairment, involving our valuation specialists to assist in evaluating significant assumptions used by management in estimating the fair value of the brand assets, and testing the completeness and accuracy of underlying data used by management in their analyses. We compared the significant assumptions used by management to historical operating results and relevant observable market information including current industry, market and economic trends. Our procedures included evaluating the historical accuracy of management’s forecasts and performing sensitivity analyses to evaluate the impact of changes to significant assumptions.