Case 6B: Accounting Policy Choices Shown below is an extract from an article in the Southern Times Financial Review on 15 August 2012. There are a few items in the article we have not covered, but you should be able to comprehend the key elements. Note 1 from the 2008 accounts of Simons’ Harbour Casino Holdings Limited notes that ‘Pre-opening expenses consist primarily of set-up costs, establishment costs and the costs associated with the organization of the Casino license, share issuance and finance costs. The policy has been that Pre-opening expenses have been written off as incurred’. Simons’: We're as good as Crown Simons’ Harbour Casino Holdings Ltd recorded a mere $1 million net profit for its first full six months of operations, falling well short of both prospectus forecasts and its booming Portland counterpart. But Chairman Mr. Bick Burton yesterday rejected suggestions that Portland's Crown Ltd was outperforming the Simons’ gaming house, saying the better bottom line at Portland's Crown Ltd was largely a function of accounting methods and had very little to do with real business operations. Simons’ Casino has chosen to account for large chunks of its expenses as they occur – rather than follow GAAP and capitalize those costs – leaving the company with large abnormal losses. ‘When you get such a significant difference in accounting practices, it skews the results,’ Mr. Burton told reporters. ‘What we're just trying to point out is that when you put it on a like-to-like basis, you'll see our result is exceptionally good.’ Mr. Burton produced a string of numbers to show that when indicators other than bottom-line profit were used, Simons Casino's position was equal to or better than its competitor. He said Portland was a bigger casino – with 2820 ‘gaming spaces’ available against Simons Casino's 1700 – and as such was always expected to show bigger overall numbers. However, on a win-per-table or win-per-visitor basis, Simons Casino was trading more strongly than Portland, he said. For example, Mr. Burton said Simon Casino's pre-abnormal $24.8 million results were wiped out by $22 million in pre-opening costs and amortization of pre-paid rentals. Before accounting for interest, tax, abnormals, depreciation, and amortization, earnings were $47 million – a result that Mr. Burton said confirmed the company was performing exceptionally well in a competitive market. However, the result was well short of prospectus forecasts. Revenue for the 2008 financial year came in 22 percent weaker than prospectus forecasts: the casino pulled in $303 million against a promised $387 million. Also, it predicted a net profit of $37 million, based on an operating profit of $67 million. Instead, its year to June result was a $4.7 million net loss and an operating profit of just $48.5 million. The casino also renewed its call for a new, lower tax rate for high-roller gamblers, saying it would bring in millions more in revenue to government coffers. Required: Explain, as simply as possible, what is included in pre-opening costs. How does the accounting treatment for pre-opening costs differ between the two casinos? What effect do the differences have on both profit and the balance sheets of the two companies? Why might Sydney Casino have chosen to account for pre-opening costs in this way? Is the choice of accounting method an excuse for not reaching profit forecasts? Your answer Typed answers are easier for students to read than handwritten notes Submit