Accounting Treatment of the Gain Made From Sale
Question :
The company’s ski resort revenues are seasonal. The ski resort industry is highly competitive and capital intensive. During the peak ski season, revenues can be substantially reduced by adverse weather conditions, equipment failure, access route closures, and the cost of transportation, even if for a moderate and limited duration. For example, unfavorable warm weather conditions result in both an increase in the costs of snowmaking operations and maintaining quality skiing conditions, and a decrease in revenues due to a decline in a number of skiers using the slopes and staying at the resorts.
Answer :
To:
xyz,
Controller,
Widget, Inc.,
350 Accounting Avenue, Northridge, California 91330
Subject – Regarding the accounting treatment of the gain made from sale of Ski restorts
Dear zyz,
As I understand, you are facing the trouble in recording the gains made from the sale of Ski resorts. To help you in resolving this difficulty, I would like to draw your attention to US GAAP where section 360 deals with the record of the sale of fixed assets. As per this rule, a sale of fixed assets which is related to day to day operations of the company should record gain as revenues however a sale which is one time in nature and is not related to the day to day operations of the business should not be recorded as the revenue. The reason for the same is that if we record the sale of Sky resort as revenue, this doesn’t present the true picture of the business. A financial statement should not present misinformation. This is a cardinal rule of a financial statement. Thus, there is a need to ensure that the sale of the Ski resort is not registered as revenue but as non-operating profit and is recorded below EBITDA (AICPA, 2018, ET Section 1.100.001.01). Another key thing to remember here is that a financial statement should be comparable. If we record the gain from the Ski resort as revenue the financial statement becomes non-comparable these were the one-time gain and will not occur in the future. Thus, if one were to compare the result of past year and next year’s then one may see a large jump in revenues.
Thus, my recommendation would be to record the gains from the sale of Ski resort as non-operating profit and it should be done below EBITDA.
Hope it helps.
Regards
XYZ
