Annual Report by a Canadian Issuer — Form 40-F Filing Table of Contents
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AUDITORS'
REPORT ON RECONCILIATION TO UNITED STATES GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES
To
the
Board of Directors of Four Seasons Hotels Inc.
On
March 9, 2007, we reported on the consolidated balance sheets of Four Seasons
Hotels Inc. as at December 31, 2006 and 2005, and the consolidated statements
of
operations, retained earnings and cash flows for the years then ended as
included in the annual report on Form 40-F. In connection with our audits
of the
aforementioned consolidated financial statements, we also have audited the
related supplemental note entitled "Reconciliation to United States Generally
Accepted Accounting Principles" included in Form 40-F. This supplemental
note is the responsibility of the Corporation's management. Our responsibility
is to express an opinion on this supplemental note based on our
audits.
In
our
opinion, such supplemental note, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein as at December 31, 2006
and
2005 and for the years then ended.
(In
thousands of US dollars except per share amounts)
The
consolidated financial statements of Four Seasons Hotels Inc. (“FSHI”) (FSHI and
its subsidiaries are collectively referred to as the “Corporation”) for the
years ended December 31, 2006 and 2005 (the "Consolidated Financial Statements")
have been prepared in accordance with generally accepted accounting principles
as applied in Canada ("Canadian GAAP"). In the following respects, generally
accepted accounting principles as applied in the United States ("US GAAP")
differ from those applied in Canada.
If
US
GAAP were employed, net earnings (loss) would be adjusted as
follows:
2006
2005
Net
earnings (loss) based on Canadian GAAP
$
50,287
$
(28,223
)
Impact
on net earnings (loss) of US GAAP adjustments:
Hotel
partnerships and corporations (a)
10,191
5,984
Hotel
disposition program (b)
17,728
-
Future
income taxes (c)
194
1,642
Convertible
notes (d)
6,852
3,806
Deferred
charges (e)
1,313
803
Foreign
exchange translation (d)(ii) and (g)
(62
)
(5,700
)
Pension
plan (h)
(77
)
(1,229
)
Stock-based
compensation (j)(i)
(4,480
)
(240
)
Net
earnings (loss) based on US GAAP
$
81,946
$
(23,157
)
Basic
earnings (loss) per Limited Voting Share based on US GAAP
(i)
$
2.34
$
(0.63
)
Basic
earnings (loss) per Variable Multiple Voting Share based on US
GAAP
(i)
$
1.17
$
(0.33
)
Diluted
earnings (loss) per share based on US GAAP
$
2.10
$
(0.63
)
1
FOUR
SEASONS HOTELS INC.
Reconciliation
to United States Generally Accepted Accounting Principles
(continued)
(In
thousands of US dollars except per share amounts)
The
impact of the US GAAP differences discussed above on the Corporation's
consolidated shareholders' equity is as follows:
2006
2005
Shareholders'
equity based on Canadian GAAP
$
648,475
$
546,726
Impact
on shareholders' equity of US GAAP adjustments:
Hotel
partnerships and corporations (a)
(59,138
)
(70,493
)
Hotel
disposition program (b)
41,177
23,878
Future
income taxes (c)
12,442
10,843
Convertible
notes (d)
(57,652
)
(64,286
)
Deferred
charges (e)
(27,580
)
(28,572
)
Foreign
exchange translation (d)(ii) and (g)
35,400
35,442
Pension
plan (h) and (j)(iii)
(4,043
)
1,884
Stock-based
compensation (j)(i)
869
-
Shareholders'
equity based on US GAAP
$
589,950
$
455,422
(a)Hotel
partnerships and corporations:
(i)
The
Corporation has minority interests (generally less than 20%) in
certain
hotel partnerships which, under Canadian GAAP, the Corporation accounts
for on a cost basis (see note 1(g) to the Consolidated Financial
Statements). Under US GAAP (AICPA Statement of Position 78-9, "Accounting
for Investments in Real Estate Ventures"), the Corporation is required
to
account for its investments in these hotel partnerships using the
equity
method of accounting, pursuant to which the Corporation records
in income
its proportionate share of the investee's net earnings or loss.
During
2006 and 2005, under Canadian GAAP, the Corporation recorded a write-down
of,
and a net gain on the dispositions of, certain investments in hotel partnerships
and corporations (see notes 12(a) and 12(b) to the Consolidated Financial
Statements). Under US GAAP, the amount of the write-down and the net gain
on the
dispositions differed as the application of equity accounting to certain
of
these investments, under US GAAP, resulted in different net book values at
the
time of the transactions than under Canadian GAAP.
2
FOUR
SEASONS HOTELS INC.
Reconciliation
to United States Generally Accepted Accounting Principles
(continued)
(In
thousands of US dollars except per share amounts)
(ii)
Prior
to January 1, 2005, under Canadian GAAP, the Corporation accounted
for its
investments in hotel partnerships and corporations, which were acquired
before May 1, 2003 with the intention that they would be disposed
of in
the foreseeable future, by the cost method, irrespective of its percentage
ownership interest. Effective January 1, 2005, under Canadian GAAP,
the
Corporation accounts for these temporary investments based on its
percentage ownership interest for each investment. Under US GAAP,
effective January 1, 2002, the Corporation accounts for these
temporary investments based on its percentage ownership interest
for each
investment, as the Financial Accounting Standards Board ("FASB")
Statement
of Financial Accounting Standards No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets", eliminated the exception to consolidate
a temporary controlled subsidiary. As a result, the Corporation
consolidated one temporary investment and equity accounted one temporary
investment prior to January 1, 2005 under US
GAAP.
(iii)
During
2004, the Corporation entered into a multi-element arrangement whereby
the
Corporation (i) sold its interest in a hotel property, (ii) entered
into a
hotel management contract with the purchaser, and (iii) entered into
a
guarantee arrangement with the purchaser. Under Canadian GAAP, as
all
three elements were entered into with the same party at the same
time, the
Corporation applied Abstract EIC-142, ”Revenue Arrangements with Multiple
Deliverables” (“EIC-142”), issued by the Emerging Issues Committee of the
Canadian Institute of Chartered Accountants. Pursuant to the requirements
of EIC-142, the Corporation determined that the sale of the hotel
property
should be accounted for as a separate unit of accounting that should
be
accounted for in 2004 as the disposal of the hotel property; and
that the
hotel management contract and the guarantee arrangement should be
accounted for as a combined unit of accounting, with the related
costs and
revenues being recognized over the term of the hotel management contract
as management services are
delivered.
Under
US GAAP, the Corporation determined that Statement of Financial Accounting
Standards No. 66, "Accounting for Sales of Real Estate", overrides the US GAAP
equivalent of EIC-142 (Emerging Issues Task Force (“EITF”) Abstract No. EITF
00-21, "Revenue Arrangements with Multiple Deliverables") and requires the
guarantee arrangement to be accounted for as a part of the sale of the hotel
property. As a result, the Corporation's estimate of the fair value of the
payments it would likely be required to make under the guarantee arrangement
was
accounted for as a reduction of the proceeds received on the sale of the hotel
property under US GAAP.
3
FOUR
SEASONS HOTELS INC.
Reconciliation
to United States Generally Accepted Accounting Principles
(continued)
(In
thousands of US dollars except per share amounts)
(iv)
Summarized
balance sheet information of the equity method investments, presented
on a
100% basis, is as follows:
2006
2005
Current
assets
$
17,848
$
74,607
Long-term
assets, net
7,840
242,356
$
25,688
$
316,963
Current
liabilities
$
7,943
$
117,990
Long-term
obligations
10,811
172,154
Equity
6,934
26,819
$
25,688
$
316,963
During
2006, the
Corporation disposed of its ownership interests in three investments, which
were
being accounted for by the equity method.
Summarized
results of
operations of the equity method investments, presented on a 100% basis, are
as
follows:
2006
2005
Revenues
$
161,656
$
182,649
Expenses
(158,871
)
(190,308
)
Net
earnings (loss)
$
2,785
$
(7,659
)
The
proportionate taxable income or loss of all hotel partnerships is included
in
the taxable income or loss of their respective partners. Accordingly, no
provisions for income taxes on such entities are included in the above
statements.
4
FOUR
SEASONS HOTELS INC.
Reconciliation
to United States Generally Accepted Accounting Principles
(continued)
(In
thousands of US dollars except per share amounts)
(b)Hotel
disposition program:
On
the
sale by the Corporation of its equity interest in one of its hotels in 1995,
C$27.8 million ($23,853) of the gain was deferred for US GAAP purposes, and
is being recognized in proportion to the cash payments received on the cash
flow
bond received as consideration on the sale. The Corporation did not recognize
any of the deferred gain in 2005 as no principal payments were received on
the
cash flow bond. The principal and interest on the cash flow bond were fully
repaid in December 2006 (see note 3(a) to the Consolidated Financial
Statements). As a result, a gain on sale of C$20.1 million ($17,728) was
recognized in 2006 under US GAAP.
(c)Future
income taxes:
The
income tax adjustment from Canadian GAAP to US GAAP results from the differences
between US GAAP and Canadian GAAP in calculating earnings (loss) before
income taxes.
(d)Convertible
notes:
(i)
Convertible
senior notes:
In
2004, FSHI issued $250,000 (principal amount) senior notes convertible into
Limited Voting Shares (“LVS”) of FSHI for net proceeds of $241,332 (see note
10(a) to the Consolidated Financial Statements). Under Canadian GAAP, the notes
were bifurcated into a debt component (representing the principal value of
a
bond of $211,754, which was estimated based on the present value of a $250,000
bond maturing in 2009, yielding 5.33% per annum, compounded semi-annually,
and
paying a coupon of 1.875% per annum) and an equity component (representing
the
value of the conversion
feature of the notes). Accordingly, net proceeds were allocated $211,754 to
long-term obligations
and $36,920
to
shareholders' equity. The offering expenses and underwriters' commission
relating
to the debt component of the notes of $7,019
were
recorded in "Other assets".
Under
US GAAP, gross proceeds of $250,000 were recorded as long-term obligations,
yielding 1.875% per annum. The total offering expenses and underwriters'
commission relating to the notes of $8,345 were recorded in "Other assets".
Accordingly, lower interest expense of $6,822 was recognized in 2006 (2005
-
$6,572) under US GAAP.
5
FOUR
SEASONS HOTELS INC.
Reconciliation
to United States Generally Accepted Accounting Principles
(continued)
(In
thousands of US dollars except per share amounts)
(ii)
Currency
and interest rate swap:
In
April 2005, FSHI entered into a currency and interest rate swap agreement to
July 30, 2009, pursuant to which the Corporation had agreed to receive
interest at a fixed rate of 5.33% per annum on an initial notional amount of
$215,842 and pay interest at a floating rate of six-month Canadian bankers'
acceptance, in arrears, plus 1.1% per annum on an initial notional amount of
C$269.2 million. On July 30, 2009, FSHI had agreed to pay C$311.8 million and
receive $250,000 under the swap (see note 10(c) to the Consolidated Financial
Statements). Under Canadian GAAP, FSHI had designated the swap as a fair value
hedge of the convertible senior notes, which resulted in an effective accounting
interest rate on the hedged notes of six-month Canadian bankers' acceptances,
in
arrears, plus 1.1%. In addition, foreign exchange translation gains and losses
on the notional amount of the swap were recognized on a monthly basis,
offsetting the respective monthly translation losses and gains recognized on
the
notes.
In
December 2006, FSHI terminated 80% of the notional amount of the currency
component of the swap relating to the final exchange of principal by making
a
payment of $21,000. Under Canadian GAAP, the loss of C$4.6 million ($4,020)
was
deferred for accounting purposes and is being amortized over the period to
July30, 2009, which is the maturity date of the swap agreement.
Under
the amended swap, FSHI will pay C$62.4 million and receive $50,000 on July30,2009. There were no other changes to the original swap, including the notional
amounts relating to the exchange of interest.
As
a
result of the partial termination of the swap, FSHI ceased hedge accounting
as
at this date under Canadian GAAP. The unrealized loss relating to the remaining
notional amount of the currency component of the swap of C$1.2 million ($1,005)
and the unrealized loss relating to the notional amount of the interest
component of the swap of C$2.1 million ($1,794) were deferred for accounting
purposes and are being amortized over the period to July 30, 2009 (see note
10(c) to the Consolidated Financial Statements).
Under
Canadian GAAP, the amended swap is being marked-to-market on a monthly basis
with the resulting changes in fair values being recognized in “Other expenses,
net”.
6
FOUR
SEASONS HOTELS INC.
Reconciliation
to United States Generally Accepted Accounting Principles
(continued)
(In
thousands of US dollars except per share amounts)
Under
US GAAP, Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("FAS 133") establishes
accounting and reporting standards for derivatives and hedging. It requires
that
all derivatives be recognized as either assets or liabilities at fair value
and
establishes criteria for the use of hedge accounting.
Under
US GAAP, the currency and interest rate swap did not meet the requirements
of
FAS 133 in order to hedge the convertible senior notes and, as a result, was
marked-to-market. Accordingly, interest expense in 2006 decreased by $1,719
(2005 - increased by $1,188) and foreign exchange gain in 2006 decreased by
$278
(2005 - foreign exchange loss increased by $6,511) under US GAAP.
(iii)
Interest
rate
swap:
In
connection with the convertible senior notes issued in 2004, FSHI entered into
an interest rate swap agreement
with an initial notional amount of $211,754, pursuant to which FSHI had agreed
to
receive interest at a fixed rate of 5.33% per annum and pay interest at
six-month LIBOR, in arrears, plus 0.4904%
(see note 10(b)
to the Consolidated Financial Statements). Under
Canadian GAAP,
FSHI had designated
the interest rate swap as a fair value hedge of the notes, which resulted in
an
effective accounting interest rate on the hedged notes to the date of
termination of the swap of six-month
LIBOR, in arrears, plus 0.4904%. Subsequently in 2004, FSHI terminated the
interest rate swap agreement
and received proceeds of $9,000.
Under
Canadian GAAP, the gain of C$9.3 million ($7,383) was deferred and is being
amortized over the period to July 30, 2009, which would have been the remaining
swap term,
as a reduction to interest expense.
Under
US GAAP, the interest rate swap did not meet the requirements in order to hedge
the convertible notes
and, as a result, was being marked-to-market. Accordingly, additional interest
expense of $1,689 was
recognized in 2006 (2005 - $1,578)
under
US GAAP. In addition, a gain on the marked-to-market adjustments and
termination
of the swap of $9,000 was recognized in 2004 under US GAAP.
7
FOUR
SEASONS HOTELS INC.
Reconciliation
to United States Generally Accepted Accounting Principles
(continued)
(In
thousands of US dollars except per share amounts)
(e)Deferred
charges:
The
Corporation defers expenditures directly related to the negotiation, structuring
and execution of new management contracts and, if the property is opened,
amortizes these deferred costs on a straight-line basis generally over a 10-year
period (see note 1(i) to the Consolidated Financial Statements). Under US GAAP,
such start-up costs are expensed.
(f)Investment
in management contracts and investment in trademarks:
On
a
Canadian GAAP basis, amortization expense of approximately $10,400 related
to
intangible assets with finite lives was recorded during the year ended December31, 2006 (2005 - $6,700). Amortization expense relating to these assets is
expected to be $7,000 in each of the fiscal years 2007 through
2011.
(g)Foreign
exchange translation:
Under
US GAAP, the US dollar amount of convertible notes allocated to long-term
obligations is higher than under Canadian GAAP ((d)(i)). The US dollar monetary
liabilities are, therefore, higher under US GAAP, which resulted in an increase
in the foreign exchange gain in 2006, under US GAAP, of $216 (2005 -
$811).
(h)Pension
plan:
Under
Canadian GAAP, the Corporation, effective January 1, 2000, changed its
accounting policy relating to the accounting for future employee benefits,
including pension benefits, to comply with the new Canadian GAAP standard for
accounting for pension plans. The Corporation adopted the new standard for
pension benefits retroactively, without restating the financial statements
of
prior periods.
Under
Canadian GAAP, the transitional provisions relating to the new Canadian GAAP
standard for accounting for pension plans permitted the impact of the change
of
the new standard to be accounted for retroactively, without restatement of
prior
years' financial statements. As a result, the Corporation recorded in 2000
a
charge to retained earnings, representing the difference between the amount
accrued by the Corporation under the prior accounting standard and the actuarial
obligation as measured under the new standard, which included the net
unamortized actuarial losses as at December 31, 1999. Under US GAAP, the net
unamortized actuarial losses as at December 31, 1999 are amortized, on a
straight-line basis, over the expected average remaining service life of
employees expected to receive benefits under the plans.
8
FOUR
SEASONS HOTELS INC.
Reconciliation
to United States Generally Accepted Accounting Principles
(continued)
(In
thousands of US dollars except per share amounts)
Effective
for fiscal years ending after December 15, 2006, under US GAAP, an entity is
required to recognize the overfunded or underfunded status of a defined benefit
plan (other than a multiemployer plan) as an asset or liability and recognize
as
a component of other comprehensive income, net of tax, the plan’s actuarial and
experience gains and losses and the prior service costs and credits ((j)(iii)).
Under Canadian GAAP, the plan’s actuarial and experience gains and losses and
the prior service costs and credits are included with the funded status of
the
plan as an asset or liability.
During
2005, the Corporation transitioned the majority of its senior executives and
hotel and resort general managers from an unfunded defined benefit retirement
plan to a fully funded retirement plan based on a defined contribution format
(see note 14(b) to the Consolidated Financial Statements). Under US GAAP, the
net unamortized actuarial losses as at December 31, 1999, relating to the
employees transitioned out of the defined benefit retirement plan, which
remained unamortized as at the date of transition, were recognized as an expense
in 2005.
(i)Basic
earnings (loss) per share:
Under
US GAAP, the Corporation applies the two-class method as required by the EITF
in
Abstract No. EITF 03-6, “Participating Securities and the Two-Class Method under
FASB Statement No. 128”, which requires the basic earnings (loss) per share for
each class of shares to be calculated assuming that 100% of the Corporation’s
earnings are distributed as dividends to each class of shares based on their
contractual rights. For purposes of this calculation, the Corporation has
allocated earnings to the LVS and Variable Multiple Voting Shares (“VMVS”) based
on its current dividend policy, which is that dividends declared and paid on
the
VMVS are in amounts per share equal to 50% of the dividends per share declared
and paid on the LVS, notwithstanding that the VMVS rank equally with the LVS
as
to distributions on liquidation, dissolution or winding-up of FSHI (see note
11(a) to the Consolidated Financial Statements).
Under
Canadian GAAP, such a requirement is not prescribed.
9
FOUR
SEASONS HOTELS INC.
Reconciliation
to United States Generally Accepted Accounting Principles
(continued)
(In
thousands of US dollars except per share amounts)
(j)New
U.S. accounting standards adopted in 2006:
(i)
Share-based
payment:
Effective
January 1, 2006, the Corporation adopted Statement of Financial Accounting
Standards No. 123 (revised 2004), “Share-Based Payment” (“FAS 123R”), issued by
the FASB, using the modified prospective application, which is one of the
transitional alternatives permitted under FAS 123R. Under the modified
prospective application, FAS 123R applies to new stock options granted and
stock
options modified, repurchased or cancelled on or after January 1, 2006, and
the
portion of stock options for which the requisite service has not been rendered
that are outstanding as of January 1, 2006. Options granted, or modified, on
or
after January 1, 2006 are measured at the grant-date fair value and recognized
as stock compensation expense over the option’s requisite service period in
accordance with the provisions of FAS 123R, with a corresponding increase to
contributed surplus. When these stock options are exercised, the proceeds,
together with the amount recorded in contributed surplus, are recorded in
capital stock. Options for which the requisite service has not been rendered
that are outstanding as of January 1, 2006 are measured at the grant-date fair
value as previously determined under Statement of Financial Accounting Standards
No. 123, as originally issued (“FAS 123”), adjusted for the estimated number of
outstanding options for which the requisite service is not expected to be
rendered. Under FAS 123, forfeitures were accounted for as they occur. Under
the
modified prospective application, prior periods are not restated.
As
permitted under FAS 123, share appreciation rights were accounted for using
the
intrinsic value method. Under FAS 123R, share appreciation rights are accounted
for using the fair value-based method.
FAS
123R eliminated an entity’s ability to account for share-based compensation
transactions using the intrinsic value method of accounting in APB Opinion
No.
25, “Accounting for Stock Issued to Employees”, which was permitted under FAS
123. Compared to the intrinsic value method of accounting in APB Opinion No.
25,
the modified prospective application of adopting FAS 123R effective January1,2006 resulted in an increase in stock-based compensation expense of $6,785,
a
decrease in net earnings of $6,785 and a decrease in basic and diluted earnings
per share of $0.19 and $0.16, respectively, in 2006. Adoption of FAS 123R did
not have any impact on cash provided by operating activities based on US GAAP
or
cash used in financing activities based on US GAAP in 2006.
10
FOUR
SEASONS HOTELS INC.
Reconciliation
to United States Generally Accepted Accounting Principles
(continued)
(In
thousands of US dollars except per share amounts)
Under
Canadian GAAP, stock options granted or modified on or after January 1, 2003
are
accounted for under the Canadian Institute of Chartered Accountants Handbook
Section 3870, “Stock-Based Compensation and Other Stock-Based Payments”, with
prior option grants accounted for using the settlement method. As a result,
additional stock compensation expense of $4,480 was recorded under US GAAP
in
2006.
In
2005, stock options were accounted for in accordance with Accounting Principles
Board Opinion No. 25 (“APB 25”), “Accounting for Stock Issued to Employees”,
under US GAAP. Had compensation for the Corporation’s stock-based compensation
plan been determined based on the fair value at the grant dates for stock
options issued under the plan after December 31, 1994, the Corporation’s US GAAP
net loss, US GAAP basic loss per share and US GAAP diluted loss per share,
for
2005, would have been adjusted to the pro forma amounts indicated
below:
2005
Net
loss based on US GAAP, as reported
$
(23,157
)
Deduct
pro forma stock option expense
(11,415
)
Pro
forma net loss
$
(34,572
)
Loss
per share:
Basic,
as reported
$
(0.63
)
Basic,
pro forma
(0.94
)
Diluted,
as
reported
(0.63
)
Diluted,
pro
forma
(0.94
)
11
FOUR
SEASONS HOTELS INC.
Reconciliation
to United States Generally Accepted Accounting Principles
(continued)
(In
thousands of US dollars except per share amounts)
(ii)Real
estate time-sharing transactions:
The
FASB issued Statement of Financial Accounting Standards No. 152, "Accounting
for
Real Estate Time-Sharing Transactions: an Amendment of FASB Statements No.
66
and 67" ("FAS 152"), which amends FASB Statement No. 66, "Accounting for Sales
of Real Estate", to reference accounting and reporting guidance for real estate
time-sharing transactions that is provided in AICPA Statement of Position 04-02,
"Accounting for Real Estate Time-Sharing Transactions" ("SOP 04-02"). FAS 152
also amends FASB Statement No. 67, "Accounting for Costs and Initial Rental
Operations of Real Estate Projects" ("FAS 67"), so that the guidance in FAS
67
about incidental operations and costs incurred to sell real estate projects
does
not apply to real estate time-sharing transactions. The implementation of both
FAS 152 and SOP 04-02 effective January 1, 2006 did not have an impact on the
Reconciliation to United States Generally Accepted Accounting Principles of
the
Corporation for the year ended December 31, 2006.
(iii)
Defined
benefit pension and other postretirement
plans:
In
September 2006, the FASB issued Statement of Financial Accounting Standards
No.
158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement
Plans - an amendment of FASB Statements No. 87, 88, 106, and 132(R)” (“FAS
158”), which requires an entity to (i) recognize the overfunded or underfunded
status of a defined benefit plan (other than a multiemployer plan), measured
as
the difference between the fair value of the plan assets and the benefit
obligation, as an asset or liability; and recognize as a component of other
comprehensive income, net of tax, the plan’s actuarial and experience gains and
losses and the prior service costs and credits (the “recognition provisions”);
and (ii) measure the funded status of a defined benefit plan as of the year-end
date (the “measurement provisions”). The implementation of the recognition
provisions of FAS 158 resulted in additional pension liability of $5,854
recorded on the balance sheet and a charge, net of taxes, of $4,402 to
accumulated other comprehensive income under US GAAP. The measurement provisions
of FAS 158 will be effective for fiscal years ending after December 15, 2008.
The Corporation has not yet determined the impact of adopting the measurement
provisions of FAS 158.
Under
Canadian GAAP, the plan’s actuarial and experience gains and losses and the
prior service costs and credits are included with the funded status of the
plan
as an asset or liability.
12
FOUR
SEASONS HOTELS INC.
Reconciliation
to United States Generally Accepted Accounting Principles
(continued)
(In
thousands of US dollars except per share amounts)
(iv)Effects
of prior year misstatements:
In
September 2006, the staff of the Securities and Exchange Commission (“SEC”)
issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial
Statements” (“SAB 108”), which addresses staff’s views on how uncorrected errors
in previous years should be considered when quantifying errors in current year
financial statements. SAB 108 requires SEC registrants to consider the effect
of
all carryover and reversing effects of prior year misstatements when quantifying
errors in current year financial statements. SAB 108 does not change the SEC
staff's previous guidance on evaluating the materiality of errors. The adoption
of SAB 108, using the dual method approach for quantifying errors in financial
statements effective January 1, 2006, did not have an impact on the
Corporation’s Reconciliation to United States Generally Accepted Accounting
Principles for the year ended December 31, 2006.
Canadian
GAAP does not prescribe any particular method of evaluating uncorrected
errors.
(k)Recent
U.S. accounting standards issued but not yet adopted:
(i)Uncertainty
in income taxes:
In
June
2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes - an interpretation of FASB Statement No. 109” (“FIN 48”), which
clarifies the accounting for uncertainty in income taxes recognized in an
enterprise’s financial statements in accordance with FASB Statement No. 109,
“Accounting for Income Taxes”. FIN 48 prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement
of
a tax position taken or expected to be taken in a tax return. FIN 48 also
provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure, and transition. The evaluation of
a
tax position in accordance with FIN 48 is a two-step process. The first step
is
recognition where the enterprise determines whether it is more likely than
not
that a tax position will be sustained upon examination, including resolution
of
any related appeals or litigation processes, based on the technical merits
of
the position. The second step is measurement where the tax position to be
recognized is measured as the largest amount of benefit that is greater than
50
percent likely of being realized upon ultimate settlement. FIN 48 is effective
for fiscal years beginning after December 15, 2006. The Corporation has not
yet
determined the impact of the adoption of FIN 48.
13
FOUR
SEASONS HOTELS INC.
Reconciliation
to United States Generally Accepted Accounting Principles
(continued)
(In
thousands of US dollars except per share amounts)
(ii)Fair
value measurements:
In
September 2006, the FASB issued Statement of Financial Accounting Standards
No.
157, “Fair Value Measurements” (“FAS 157”), which defines fair value,
establishes a framework for measuring fair value in GAAP, and requires enhanced
disclosures about fair value measurements. FAS 157 applies when other accounting
pronouncements require or permit fair value measurements; it does not require
new fair value measurements. FAS 157 is effective for financial statements
issued for fiscal years beginning after November 15, 2007, and interim periods
within those years. The impact of the adoption of FAS 157 will depend upon
the
fair value measurements required at the time of adoption.
(iii)
Conversion
of an instrument that became convertible upon the issuer's exercise
of a
call option:
The
FASB ratified a consensus reached by the EITF in Abstract No. EITF 05-1,
"Accounting for the Conversion of an Instrument That Became Convertible upon
the
Issuer's Exercise of a Call Option", in which the EITF reached a consensus
that
the issuance of equity securities to settle a debt instrument, which became
convertible on the issuer's exercise of a call option, should be accounted
for
as a conversion if the debt instrument contained a substantive conversion
feature as of its issuance date. Absent a substantive conversion feature, it
should be accounted for as a debt extinguishment. The consensus is effective
for
periods beginning after June 28, 2006, with early application permitted in
periods for which financial statements have not yet been issued. Retrospective
application to previously issued financial statements is not permitted. The
Corporation does not believe that the accounting for the conversion of its
convertible senior notes as a result of the exercise of its call option would
be
different under Canadian and US GAAP.
(l)Consolidated
statements of cash flows:
(i)
For
Canadian GAAP purposes, the Corporation's consolidated statements
of cash
flows only show the total change in non-cash operating assets and
liabilities. US GAAP requires the statements to show the details
of
changes in non-cash operating assets and liabilities.
In
addition, the above adjustments to US GAAP earnings relating to deferred charges
(e) would also affect cash provided by operating activities and cash used in
investing activities.
14
FOUR
SEASONS HOTELS INC.
Reconciliation
to United States Generally Accepted Accounting Principles
(continued)
(In
thousands of US dollars except per share amounts)
Under
Canadian GAAP, the amount paid on partial termination of the currency and
interest rate swap is recorded as cash used in operating activities. Under
US
GAAP, the amount paid is recorded as cash used in investing activities
((d)(ii)).
As
a
result, cash provided by operating activities would be presented as follows
on a
US GAAP basis:
2006
2005
Net
earnings (loss) based on US GAAP
$
81,946
$
(23,157
)
Adjustments:
Stock-based
compensation expense
9,735
2,564
Depreciation
and amortization
11,562
8,456
Unrealized
foreign exchange loss (gain)
(1,281
)
30,332
Provision
for
loss
3,074
32,284
Gain
on
disposition of assets
(28,092
)
(10,675
)
Loss
on
retirement benefit plan transition
-
35,467
Equity
loss (gain) and distributions from hotel investments
(447
)
1,516
Future
income taxes
5,311
(14,395
)
Other
(217
)
2,741
Amount
paid relating to retirement benefit plan transition
-
(36,029
)
Change
in non-cash working capital:
Accounts
and
notes receivable
4,739
(977
)
Inventory
(7,402
)
(212
)
Prepaid
expenses and other assets
(405
)
(426
)
Accounts
payable and accrued liabilities
17,835
(734
)
Foreign
currency translation effect on non-cash working capital
891
(2,206
)
Cash
provided by operating activities based on US GAAP
$
97,249
$
24,549
15
FOUR
SEASONS HOTELS INC.
Reconciliation
to United States Generally Accepted Accounting Principles
(continued)
(In
thousands of US dollars except per share amounts)
(ii) As
a
result of the above adjustments, the major captions on the Corporation's
consolidated statements of cash flows on a Canadian GAAP basis are reconciled
to
a US GAAP basis as follows:
2006
2005
Cash
provided by operating activities based on Canadian
GAAP
$
77,972
$
26,477
Amount
paid relating to partial termination of currency and interest rate
swap
21,000
-
Deferred
charges
(1,723
)
(1,928
)
Cash
provided by operating activities based on US GAAP
$
97,249
$
24,549
Cash
provided by (used in) investing activities based on Canadian
GAAP
$
6,587
$
(10,276
)
Amount
paid relating to partial termination of currency and interest rate
swap
(21,000
)
-
Deferred
charges
1,723
1,928
Disposition
of temporary controlled subsidiary
-
(3,131
)
Cash
used in investing activities based on US GAAP
$
(12,690
)
$
(11,479
)
Cash
provided by financing activities based on Canadian and US
GAAP
$
29,828
$
3,943
Increase
in cash and cash equivalents based on US GAAP
$
114,387
$
17,013
16
FOUR
SEASONS HOTELS INC.
Reconciliation
to United States Generally Accepted Accounting Principles
(continued)
(In
thousands of US dollars except per share amounts)
(m)Comprehensive
income:
Statement
of Financial Accounting Standards No. 130 ("FAS 130") establishes standards
under US GAAP for reporting and displaying comprehensive income and its
components (revenues, expenses, gains and losses) in a full set of
general-purpose financial statements. FAS 130 requires that all items that
are
required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed
with
the same prominence as other financial statements.
FAS
130
requires companies to (i) classify items of other comprehensive income by
their
nature in a financial statement, and (ii) display the accumulated balance
of
other comprehensive income separately from capital stock, contributed surplus
and retained earnings in the shareholders' equity section of the balance
sheet.
The
statements of comprehensive income (loss) for the years ended December 31,2006
and 2005 would be presented as follows on a US GAAP basis:
2006
2005
Net
earnings (loss) based on US GAAP
$
81,946
$
(23,157
)
Other
comprehensive gain (loss), net of income taxes:
Foreign
currency translation gain (loss)
16,876
(12,411
)
Comprehensive
income (loss) based on US GAAP
$
98,822
$
(35,568
)
The
accumulated
other comprehensive income balances for the years ended December 31, 2006
and 2005 would be presented as follows on a US GAAP basis:
