Great Canadian Gaming Corporation (GCGC) has in the past been criticized for its aggressive accounting by the independent research firm Veritas Investment Research. The company’s shares trade on the TSX and it operates casinos, racetracks, slot machines, and other entertainment venues. In British Columbia, the provincial government helps casino operators expand by allowing casinos to keep an additional percentage of gambling revenues until an expansion has been paid for. For instance, if the casino operator spends additional funds on new slot machines, it can keep additional operating profits that would otherwise have been paid to the government. Sometimes, it takes many years for a casino to recoup such an investment. Casino companies also pay into a marketing fund of the provincial lottery corporation and these funds are used to advertise the casinos. GCGC capitalizes the amounts that it pays into the marketing fund. The following is an excerpt from the notes to the 2008 financial statements of the company:
7. RIVER ROCK CANADA LINE PARKING GARAGE
In 2006, the Company entered into a letter of intent with the South Coast British Columbia Transportation Authority (“TransLink”) and Canada Line Rapid Transit Inc. (“Canada Line”) to build and operate a 1,200 stall multi-level park- ing garage at Bridgeport Station, across from the River Rock Casino Resort (“River Rock”) in Richmond, British Columbia. On August 22, 2008, the Company entered into definitive agreements for this transaction. Under the terms of the agreements, the Company will reserve 1,200 parking stalls for Canada Line passengers on week- days between 5:30am and 7:00pm and 600 stalls for all other times. As compensation for the cost of providing these future parking services, TransLink has agreed to provide the Company with approximately 5 acres of land (with an estimated market value of $17.2), 2.6 acres of which is being used for the new parking garage, and $2.5 in cash of which $1.5 has been received as at December 31, 2008. The Company has received legal title to approximately 3.8 acres of the land. The remaining 1.2 acres will be transferred to the Company once the sub-division has been approved by the local municipality. The Company will also receive from TransLink a $2.0 cash payment for an option to purchase the portion of the parking garage used by the 1,200 stalls. TransLink may only exercise this option if certain events defined in the agreement occur. Examples of these include the relocation of the River Rock, or the Company failing to provide Canada Line’s passengers access to the parking stalls as set out in the agreement.
Instructions
As an independent analyst, provide a critical analysis of the financial reporting issues related to the above.