Newest IMAX Accounting Gaffe: Real Estate

Rent reductions weren't allocated on a straight-line basis over leases' remaining terms.

Adding to a seemingly nonstop series of accounting problems, IMAX Corp. says it will restate its financial statements for 2006 and the first two quarters of 2007 due to improper accounting of seven real estate leases. The total amount of the revision will be between $5.5 million and $6.5 million, with most of it applicable to the 1997–2002 period.

The company says it previously recorded rent reductions received on some real property leases in the years the reductions were received, rather than on a straight-line basis over the remaining lease term. The reductions included rent holidays and abatements. In addition, IMAX did not properly record certain leasehold improvements funded by landlord construction allowances.

The theater and entertainment technology company says the $5.5 million to $6.5 million deferred rent credit will be amortized into income over the remaining terms of the applicable real estate leases. It emphasizes that the restatement will not affect its cash or liquidity, or relate to revenue recognition in connection with its theater system or film revenue.

IMAX says it will file the restatements within 35 days.

In March the Mississauga, Ontario-based company warned that it would delay filing its financial statements because it needed to restate its results over a six-year period after identifying $2.6 million of accounting errors. It also briefly delayed filing its fiscal 2006 annual report, which had been due March 16.

IMAX acknowledged that it had capitalized some costs that should have been expensed, and that it also would make certain adjustments for errors it previously had identified and determined immaterial. The company added that it was evaluating its internal controls over financial reporting and expected to report material weaknesses.

In early July, the company said it was unable to meet a June 30 deadline and expected to be in default of certain indentures relating to its 9 5/8 percent senior notes due in 2010.

IMAX added, however, that it expected to make the filings within the 30-day period after notice of default, which allows the default to be cured before holders can seek to accelerate payments. The company said it had substantially addressed the Securities and Exchange Commission’s comments by revising its accounting policy regarding revenue recognition for theater systems.

In September private-equity fund Catalyst Fund Limited Partnership II, which owns notes and stock in IMAX, said it was seeking the appointment of an inspector, or information about the status of U.S. and Canadian investigations of the theater owner, under a provision in Canadian corporate law that gives holders rights when a company delays filing restatements of prior results. It filed an application in Ontario Superior Court under what are called the oppression remedy provisions of the Canada Business Corporations Act.

The investor said the suit arose from company plans to restate its financials, certain debt defaults, complaints about the content and accuracy of IMAX’s public statements and regulatory filings, and concerns relating to a lack of both internal financial controls and a remediation plan at IMAX.

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