Hospitality Inc. (HI) is a holding company with wholly owned interests in the travel and entertainment industry. It is listed on the Toronto Stock Exchange and is subject to the reporting requirements of that exchange and of the Ontario Securities Commission. The company has four operating divisions:

1. Travel Adventures Inc. (TAI) is a travel services company. It sells vacation packages to vacation destinations, both at retail and at wholesale (i.e., to other travel agencies). TAI is incorporated in British Columbia and operates 12 retail travel offices in the province. The company also sells its package vacations throughout Canada through agencies in other provinces.

2. Sunsation Inc. is a charter airline incorporated in Alberta that operates between Western Canada and various Caribbean and Central American vacation “sun destinations,” and also to Hawaii. Sunsation’s main customer is TAI. TAI buys bulk seat blocks on Sunsation’s flights and resells them at retail (and at wholesale to other retail travel agencies). Sunsation also provides flights to sun destinations for an Alaska based tour company. As a Canadian airline, Sunsation must operate the flights through Vancouver.

3. Elegance Ltd. is a hotel management company that manages hotels in the Caribbean, Costa Rica, and Mexico. Elegance is incorporated in the Cayman Islands a “tax haven” that imposes no income taxes on corporations. Many (but not all) of TAI’s tours are booked into Elegance’s hotels.

4. Brookside Investments Corp. is a real estate company that owns and operates several commercial developments in Canada. It also owns some of the hotels managed by Elegance, including all the Mexican hotels TAI uses for its tour groups.

The senior executives of each of the operating divisions report directly to the senior executives of HI. In mid 20X1, the North American economy entered a severe recessionary period. The recession caused a significant decline in the vacation travel business in late 20X1 and throughout 20X2. TAI was forced to cancel about 30% of its planned 20X1 tours due to lack of client bookings. The decline in vacation travel caused many airlines to reduce flight frequency. Sunsation was no exception. To make matters worse, the general decline in the travel business enabled All Alaska Airways (AAA) to lease long range jet aircraft at reduced rates and take over the charter services Sunsation had been operating from Alaska, because AAA had no need to stop in Vancouver on the way from Alaska to warmer climates.

The multiple effects of the decline in vacation travel caused a sharp drop in revenue from all of HI’s business segments, although TAI and Sunsation were affected more drastically than Elegance and Brookside. Elegance, operating through management contracts, and Brookside, with its non travel related commercial developments in Canada, had less direct exposure to the travel slump.

The recession put HI’s shares under extreme pressure, and two large HI shareholders demanded that the company “clean up its act” and put the company on sounder footing. Therefore, late in the third quarter of 20X2, HI’s board of directors developed a restructuring plan, the major components of which are as follows:

Changes in Travel Adventures Inc.

Due to the slump in the travel business, HI’s board decided to revamp TAI’s operations. TAI announced its intention to close all but two of its retail travel offices, leaving only a single office each in Vancouver and Victoria. The company intended to significantly reduce the volume of personal travel counselling. Instead, the company would focus on corporate business travel and will also develop a stronger Internet presence for selling its tour packages. In December, HI publicly announced its intention to close 10 of its 12 offices in the first quarter of 20X3, offering transfers to some employees and generous severance packages to all full time staff. Part time employees would receive two weeks’ pay after the offices close. TAI estimates the cost of severance packages at $1,340,000, although that amount had not been publicly announced.

TAI also contracted an Internet consultant to help the company develop a detailed request for proposals (RFP) for the planned website development. The RFP was expected to be issued in January 20X3, a development company retained in February, and a new on line presence made public in March. HI budgeted $1.5 million for a full featured website.

Sale of Hotel Properties

To generate some much needed cash and to relieve HI of the burden of properties with negative cash flow, HI’s board of directors decided to put the Mexican hotel group on the market. The Mexican hotels were owned by a wholly owned subsidiary of Brookside Investments Corp.

On 23 November 20X2, after conclusion of a 60 day open bidding period, the HI board accepted a purchase proposal from Lincoln Goodview Ltd. (LGL). LGL agreed to acquire all of Brookside’s shares in the Mexican subsidiary for cash consideration of $250 million. LGL would acquire all the division’s assets and assume all debt related to the Mexican properties. The purchase price was $250 million, based on the fair value of the hotel assets less the present value of the related mortgage debt. The transaction was contingent upon the completion of LGL’s due diligence review of the Mexican hotel group’s books. LGL’s due diligence was expected to be completed in February 20X3. In the meantime, Brookside would continue to operate the hotels and will receive all monies until the sale was finalized, which was expected to occur in February 20X3, pending approval by the Mexican authorities.

The net book value of the division’s real estate asset portfolio was $930 million on 23 November 20X2. The appraised fair value on 23 November was $1,240 million. At 31 December 20X2, the fair value of the portfolio was $1,360 million. The fair value of the related debt was $790 million on 23 November and $780 million on 31 December.

In 20X1, the Mexican hotel subsidiary had total revenues of $160 million and net income of $10 million. Revenue for 20X2 was expected to be $110 million, with a net operating loss of approximately $18 million.

LGL agreed to keep Elegance’s management contracts for the Mexican hotels in place for at least two years.

Sale of Retail Mall

In July 20X2, HI realized that the company needed to improve its consolidated working capital position to satisfy a debt covenant. Therefore, HI asked Brookside to find a buyer for one of its major retail malls. After reviewing its portfolio, Brookside managers decided to put a fairly new retail mall in suburban Toronto on the market. The mall seemed to be a good prospect for sale, as it was located in a growing area populated mainly by fairly wealthy recent (incoming) immigrants from mainland China and was little affected by the recession. The mall had been constructed just three years ago and was carried on Brookside’s books at $200 million, of which $15 million would have been charged to expense by the end of 20X2.

Because of the good future prospects for the region and the mall, Brookside decided to retain 51% interest in the mall and sell only 49%. Brookside retained a facilitator for the sale, promising a 5% commission. Although there was no publicly announced asking price, the facilitator let it be known that Brookside would entertain only offers of $100 million or higher.

Several real property developers in the United States and Canada expressed interest. However, in December 20X2, Brookside accepted an offer from a large pension fund for $123 million, conditional on the buyer’s due diligence investigation. The buyer gave Brookside a 10% deposit. The tentative closing date was 15 April 20X3.

Required:

What are the reporting implications of these three transactions? Explain how each would be shown on HI’s consolidated statements for the year ending 31 December 20X2. Be specific.