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Accounting policy choices

This case refers to some interesting accounting decisions 20 years ago but still of interest. Note 1 from the 1996 accounts of Sydney Harbour Casino Holdings Limited notes that ‘Pre-opening expenses consist primarily of set-up costs, establishment costs and the costs associated with the organisation of the Casino licence, share issue and finance costs. Pre-opening expenses have been written off as incurred’.

Pre-opening Costs for a Casino

When Sydney Harbour Casino Holdings Ltd opened back in 1996 it recorded $1 million net profit for its first six months of operations, but this was a lot less than both prospectus forecasts and its main competitor, Crown Casino in Melbourne. The chairman of Sydney Harbour Casino argued that Crown’s better performance was largely due to accounting methods rather than with real operations. The big difference is that Sydney Harbour Casino treated its pre-opening costs as expenses in its first year while Crown capitalised those costs. The result was that Sydney Casino’s $24.8 million profit was reduced by $22 million in pre-opening costs and amortisation of pre-paid rentals. Its EBIT was $47 million but the result was a lot lower than prospectus forecasts and revenue for the 1996 financial year was 22 per cent lower than prospectus forecasts and its predicted net profit of $37 million. Press announcements referred to the casino’s renewed calls for a new, lower tax rate for high-roller gamblers, and outlining the benefits this would bring to NSW by additional revenue dollars for the government.

Adapted from Australian Financial Review, 15 August 1996

1 Explain, as simply as possible, what is included in pre-opening costs.

2 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?

3 Why might Sydney Casino have chosen to account for pre-opening costs in this way?

4 Is the choice of accounting method an excuse for not reaching profit forecasts?

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