Question

Ferry Services Incorporated (FSI) is a public company that has three divisions. The first division provides coastal ferry services on the West and East coasts of Canada. The second division designs and builds ferries for their own use as well as for external customers. The third division operates and manages ferry terminal buildings.
In 2011, FSI anticipates a taxable loss of $20 million due to a major hurricane that sunk one of their ferry ships and caused extensive damage to one of their terminal buildings. For the past three years they have had taxable income of 2008 - $5 million; 2009 - $10 million; and 2010 - $8 million.
FSI has a number of long-term bank loans with Canadian Big Bank. In 2011, they obtained additional financing to recover from the costs associated with the hurricane. The bank requires annual audited financial statements. The new loan has a financial covenant requiring that FSI maintain a certain current ratio, as well as dividend distribution is restricted until the loan is paid off.
You have recently been hired to develop new accounting policies for FSI’s Dec 31 year-end. You have been asked by the Board to discuss alternatives and provide recommendations on the appropriate accounting policies for events that have occurred during 2011. Where possible you have been asked to quantify the impact of the accounting policies. The incremental borrowing rate for FSI is 8%. The tax rates for the last few years were: 2008 (40%), 2009 (38%), and 2010 (38%). The tax rate for 2011 is 40%.
1) A major hurricane hit the Eastern Coast in the fall of 2011. This hurricane was tracking to miss the Eastern Seaboard but had a sudden change in direction. FSI was caught off guard and one of their ferries as well as a ferry terminal was in the direct path of the hurricane. Unfortunately, FSI found out that their insurance did not cover hurricane damage. To cover the costs associated with the damages FSI obtained a new five year bank loan of $25 million with quarterly interest payments. Their cost of borrowing was 8% a year. To obtain the loan FSI had to pay $1 million of transaction costs.
2) The ferry was one of their older ferries with a carrying amount of $2 million dollars. The costs to recover the ferry are approximately $3 million and it is anticipated they will receive $0.5 million worth of salvaged material. The ferry will need to be replaced and construction was initiated in December 2011. The estimated construction costs are $20 million since the ferry will be state of the art with a new weather warning software system. Construction is expected to be completed in the spring of 2013. Until that time a ferry was brought out of retirement. The ferry had been retired due to extensive renovations required to meet environmental legislation. These renovations cost FSI $2 million in 2011.
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3) The damage to the terminal was $7 million. FSI leases all of their terminals from Leasing Incorporated (LI). This lease has a remaining lease term of 2 years. Due to the terms of the lease agreement FSI is required to pay a large penalty of $5 million dollars for repairs to the terminal. This cost far exceeds the remaining benefits of the lease agreement.
4) A lawsuit was launched in December 2011 against FSI due to the tragedy of the sinking of the ferry. FSI decided that they want to settle quickly out of court to avoid negative publicity. They have offered $5 million to the families. Their lawyers have not responded to this offer.
5) Passengers can purchase their ferry tickets on-line through Tickets.com. To encourage use of the ferry FSI provides passengers free parking if they purchase an annual pass. Otherwise passengers pay a daily rate to park their vehicle.
6) Some of the ferries contain asbestos. Changes in government legislation in 2011 require FSI to remove the asbestos in 2016. The anticipated cost of removal is $5 million.
7) FSI leases their ferry terminals from Leasing Incorporated. In 2011, FSI obtained the rights to operate a ferry on a new route. They entered into a lease agreement for a newly constructed terminal and the land. The lease term is for 60 years with a 20 year bargain renewal term.
8) In 2011, FSI issued $10,000,000 of 8% convertible bonds at the option of FSI into common shares. These bonds mature in five years and are convertible at that time by FSI into common shares at a rate of 50 shares for each $1,000 bond.

Answer 1

(1)Directors of the Authority, aside from its first directors who are in their first term of office with the Authority, must be qualified Authority candidates and must be appointed in accordance with this Division.

(2)For the needs of this Division, the elected official in Council may, by regulation, designate 4 appointment areas consisting of these coastal regional districts that the elected official in Council may prescribe.

(3)Subject to section 4, the board of directors of the Authority is to incorporates 9 individuals of whom

(a)4 are to be appointed from the nominees provided under section 6 (1) (a) or 7 (1) (a) by appointment areas, with one director being appointed out of the nominees provided by each of the 4 appointment areas,

(b)one is to be appointed from nominees provided under section 6 (1) (b) or 7 (1) (b) by the organization representing the staff of Canadian province Ferry Corporation, and

(c)4 are to be appointed by the elected official in Council from qualified Authority candidates.

(d)[Repealed 2019-9-2.]

(4)Subject to subsection (5) and to sections 4 and 6 (3), the term of office of a director of the Authority is 3 years, beginning on April 1 and ending on the third March 31 to follow the start of the director's term, and a director could also be appointed for less than 2 consecutive terms.

(5)A director of the Authority is removed as, and ceases to be, a director of the Authority on the passing of a resolution thereto effect by the remaining directors.

Directors whose terms begin April 1, 2004
6 (1)For the needs of appointing directors to switch the primary directors of the Authority, on or before September 30, 2003,

(a)each appointment area must provide to the administrators of the Authority a listing of a minimum of 3 and less than 5 nominees who are qualified individuals, and

(b)the organization representing the staff of Canadian province Ferry Corporation must provide to the administrators of the Authority a listing of a minimum of 3 and less than 5 nominees who are qualified individuals.

(2)On or before the expiry of the term of the primary directors of the Authority, the elected official in Council is, subject to section 12, to appoint 2 qualified individuals as directors, and must promptly notify the administrators of the Authority of these appointments.

(3)After receiving the lists of nominees provided under subsection (1) and on or before the expiry of the term of the primary directors of the Authority, the administrators of the Authority are, subject to section 12, to appoint 7 individuals as directors in accordance with section 5 (3) (a), (b) and (d), and of the 9 individuals appointed under this section,

(a)3 must be appointed for a term of 1 year,

(b)3 must be appointed for a term of two years, and

(c)3 must be appointed for a term of three years.

(4)If an arrangement area or the organization representing the staff of Canadian province Ferry Corporation doesn't adjust to subsection (1), the administrators of the Authority are, on or before the expiry of the term of the primary directors of the Authority and subject to section 12, to appoint a professional individual as director, which director is deemed to be appointed from the nominees of that appointment area or organization.

Subsequent directors
7 (1)For the needs of appointing directors aside from directors appointed under section 6,

(a)an appointment area is, a minimum of 3 months before the expiry of the term of every director appointed from its nominees, to supply to the administrators of the Authority a listing of a minimum of 3 and less than 5 nominees who are qualified Authority candidates, and

(b)the organization representing the staff of Canadian province Ferry Corporation is, a minimum of 3 months before the expiry of the term of a director appointed from its nominees, to supply to the administrators of the Authority a listing of a minimum of 3 and less than 5 nominees who are qualified Authority candidates.

(2)After receiving the lists of nominees provided under subsection (1), the administrators of the Authority whose terms of office don't expire at the tip of the financial year within which the lists were received must, subject to section 12, appoint as directors one among the nominees from each of the submitted lists.

(3)On or before the expiry of the term of every director appointed under section 5 (3) (c), the elected official in Council is, subject to section 12, to appoint a professional Authority candidate as a replacement director and must promptly notify the administrators of the Authority of that appointment.

(4)On or before the expiry of the term of every director appointed under section 5 (3) (d), the administrators of the Authority are, subject to section 12, to appoint a professional Authority candidate as a replacement director.

(5)If an arrangement area or the organization representing the staff of Canadian province Ferry Corporation doesn't adjust to subsection (1), the administrators of the Authority are, on or before the expiry of the term of the director for whose replacement the list was required under subsection (1) and subject to section 12, to appoint a professional Authority candidate as director, which director is deemed to be appointed from the nominees of that appointment area or organization.