Holiday Hotel Limited (HHL) is a small Canadian corporation founded under the Canadian Business Corporation Act. It has only marginally been profitable since its establishment in 1973. In addition, it incurred serious losses recently, making significant reduction in its equity base. This encouraged lenders to closely scrutinize its financial situation and secured creditors required for audited financial statements of 20x3for the first time. Company management, however, was convinced for its viability and sustainability by its operations presented in its income statement.
HHL has four resorts, and strives for service quality and customer satisfaction. It only provides vacation packages including meals, beverages, and entertainment for a one-week period. Several resorts only have two or three months peak season, and they have to be closed in the off-season. We found lots of issues we should be concerned with, such as revenue reorganization, expense capitalization and depreciation, Tax issues, related party transaction, extraordinary items and pension plan, etc.
Most of them are related to accounting changes.
Guideline for the policy change:
There are three types of accounting changes. After reviewing this case, we found many issues were involved in accounting policy changes and one error needed to be corrected.
As to policy changes, there are three recommended approaches: retroactive with restatement, retroactive without restatement, and prospective. Due to lack of sufficiently detailed information, we are not able to restate the impact of policy changes on previous years' financial results, and thus the retroactive without restatement is applied.
1. Revenue recognition, Capitalization and amortization, Future income tax. When we are considering these three issues, the cumulative impact of the changes on retained earnings in previous years is demanded and is reported as an adjustment to opening retained earnings for the current year.
2. Pension plan. Since the hotel employees in the two Canadian...