Your friend is considering investing in Cineplex Inc., a publicly traded company listed on the Toronto Stock Exchange. She believes the failure of DVD retailers has drastically improved prospects for Cineplex. She seeks your advice on accounting matters, and provides you with the following information she obtained on the Internet.
Cineplex is the largest cinema company in Canada, operating over 1,600 screens in theaters across 10 provinces. August is generally its peak season, followed by December and January. The majority of the $1 billion of revenues comes from box office ticket sales, followed by approximately 30% derived from concessions such as soft drinks and popcorn. 1 In 2013, over 73 million patrons watched films at Cineplex theaters, spending an average of $9.15 on a ticket and $4.82 on concessions. 2 Both activities generated healthy profit margins. Film rental costs, which represent the company’s largest expenditure, are often difficult to assess. In some cases, the final film cost depends on the ultimate duration of the film’s play and, until this is known, management uses its best estimate of the final settlement to match costs with revenues in each reporting period.
Goodwill represents the largest asset on the company’s balance sheet at a value of $600 million, and reflects amounts paid on the recent acquisition of two subsidiaries. The property, plant, and equipment balance is the next largest item, reported at a value of $500 million. This amount does not reflect the full economic value of the land and buildings deployed to earn the revenues of a billion dollars. Many of the cinemas and properties are leased, and are therefore not on Cineplex’s balance sheet. This may be a concern for Cineplex, since there is a proposal to change the current accounting standards such that most leases would be treated as if Cineplex owned the underlying buildings and property. When setting up these leases as assets, accounting rules assume they were acquired with debt, which creates both an asset and a corresponding liability. While Cineplex management would be pleased with the asset side of this transaction, the additional liability could create issues.
A large and growing item on Cineplex’s balance sheet is deferred revenue from gift cards. Unlike typical transactions where payment is received after the good or service is provided, gift cards generate the opposite pattern of cash flows. The bulk of gift cards are sold around Christmas time; therefore, large amounts are typically outstanding when Cineplex closes its books for its December 31 year-end.
Your friend has uncovered additional information from Cineplex’s annual general meeting. It appears the CEO’s compensation package includes a base salary, share ownership, and a bonus based on multiple performance targets such as:

• Concession revenue target of $3.74 per patron
• Operating expense target of $3.86 per patron
• Adjusted net income of $204.20 million
• Other income target of $144.25 million

Your friend is not sure why these targets exist and why they are made so specific.

Required:
Provide your friend with your view on the qualitative characteristics of the financial statement items. Discuss the proposed change in accounting rules for leases from the perspective of users. Provide some thoughts on the executive compensation package.