Describe about the Business Accounting for Land and Building.
In the case given, there are mainly 2 proposal on which the board of the directors of the company are confused as to which alternative must be chosen. This report relates with the issue of shares and the other with the sale and leaseback of the land and building.
The company undertaken for the purposes of this report is Black Box Ltd.
This report and the main aim of the Black Box Ltd is to know as to which option under the given 2 proposals would be favourable for it.
The company is trying to look and go for an option that results in the minimum amount of the cash outflow and also the same complies with the Australian Accounting standards.
The AASB 132 deals with the presentation of the various financial instruments. In respect of the equity instruments, the examples of which includes the non-puttable ordinary shares, many types of the preference shares and warrants. The issuer of these non-puttable ordinary shares takes into account the fact that there are many of the formal acts that make the distribution and also become somewhat legally obliged to the shareholders in doing the same. This would be so when there is a declaration of the dividend or when the entity is being wound up or in the case, there are any assets left out after the satisfaction of the various liabilities that becomes distributable to the shareholders. There is a purchased call option or there are some of the similar contracts that have been acquired by the entity and that gives them the right to acquire the fixed number of the equity instruments in exchange of the delivering of the fixed amounts of cash or any other financial asset which is not a financial asset for the company. Further, in respect of the settlement of the equity instrument of the company which are its own, the examples of which includes the classification of the different types of the contracts of the own equity instruments of the company. These would further include the contract that would be settled by the entity when it comes to receiving or delivering the fixed number of the own shares for the future consideration or exchanging the fixed number of the own shares of the company for the fixed amount of cash or any other financial asset which is an equity instruments. As per the standard, any amount of consideration which would be received or be paid for such of the contract would be added or be deducted from the equity. On example of the same would be the issued share option that gives the right to the company to buy some fixed number of the shares of the entity for a fixed amount of cash. In case, there is a contract that requires the entity to purchase its own shares or any other financial assets at some fixed or at a determinable date or in demand, then the entity would recognise that financial liability for the present value of that redemption amount. An example of the same would be the obligation of the entity under the forward contract to repurchase the number of its own shares for a fixed amount of cash. When an entity decides to purchase back its own shares, then that would give rise to the financial liability for the present value of the amount of redemption even in the case wherein the shares have bene obliged to be repurchased and the same is not fixed or in case, the obligation is somewhat conditional on the counterparty that exercises the right of redemption. Another example of the same is the conditional obligation which is an issued option which requires the entity to purchase the own shares of the company for cash in case the counterparty exercises this option (AASB, 2016).
There could be a contract wherein the settlement may be in cash or in any other form of a financial asset. This would include the payment of cash or the financial asset that would be delivered or received on the basis of the changes made in the market price of the equity of the company. There could be a contract that could be settled in a variety of ways in the own shares of the company whose value is equal to the underlying value of that asset. Such a contract is considered to be a financial asset or a financial liability (AASB, 2016).
Now, if the company goes for the payment of just $50 per shares, then there would be a cash outlay of $6,140,000 but if the company goes for the second option, then then cash outlay of the company would be $7,613,600. So, it is recommended that the company goes for the first option wherein it just has to pay $50 per share at the end of the 10 years. This is as per AASB 132.
The company’s usually want to keep leases off their books since they like to defer their expenses and they do the same by the way of reporting their leases as operating leases. The financial Accounting standards Board has the following rule when it comes to treating the lease as the capital lease. The capital lease is when it meets any of the following 4 conditions:
Under the given case, company Black Box has an option to purchase back the asset in the end of the 10 years which is the useful life of the asset. Since this condition has been fulfilled, it can be considered as a capital lease.
AASB 117 on leases states that this transaction includes the sale of the asset and then leasing the same back to the seller of that asset. The payment of the lease and the sales price is interdependent since these have been negotiated as a package (Chartered Accountants, 2016). In case, the leaseback is a finance lease, then the transaction would provide the finance to the lease with the asset in the security. It is for this reason that the excess amount is never treated as the income in the statement of profit or loss. In case, the sale price of the asset is below its market value, then the any profit or loss that have been recognised shall be deferred and shall be amortised over the term of the lease for which the asset is expected to be used. In case, the leaseback is an operating lease, then the payments of the lease and if the sales price is at the fair value, and there has been a normal sales transaction, then any amount of profit or loss would be recognised immediately. For the purposes of the finance lease, there is no adjustment necessary till there is a fall in the value in the asset in which the carrying amount would go on to reduce the amount of the recoverable as per the requirements of the AASB. The disclosure requirements for the lessees and the lessors would be applied. And the same would apply in the case of the sales and leaseback transactions as well. The required description of the material leasing arrangements would lead to the disclosing of the unique or an unusual provision of the terms and the agreement of the transactions of sales and leaseback (AASB, 2016).
If we follow the above stated standard on accounting, then it is a capital lease but the company would benefit if it goes for the operating lease.
The company if it goes for the operating lease would pay and the amount of the lease and would charge the stated expense as against the profit for each year but if it goes for the capital lease, then it would be entitled for the depreciation and also, the lease payment would be treated like a loan. So, double benefit in the case if the company goes for capital lease. So, it must go for capital lease.
For proposal number 2, the question is about as to whether the company must go for the operating or the capital/finance lease as per the AASB 117. As per the facts given in the question, the company will have to follow the capital/finance lease method since the majority period of the lease term is more than 75% of the total useful life of the asset. Also, this method is beneficial for the company since in this method, the company could treat the lease on the asset as loan and it would be entitled for tax deduction on this and also, it would be able to claim the depreciation on that asset which is gain tax deductible. Hence, capital/finance lease would be beneficial for Black Box.
Conclusion:
In respect of Proposal 1, it would be appropriate if the company goes for the cash payment at the end of the 10 th year. This is since it leads to a reduced cash outflow for the company. Further, the company must go for the cash payment at the end of the 10th year. Now, if the company goes for the payment of just $50 per shares, then there would be a cash outlay of $6,140,000 but if the company goes for the second option, then then cash outlay of the company would be $7,613,600. So, it is recommended that the company goes for the first option wherein it just has to pay $50 per share at the end of the 10 years.
In respect of proposal 2, the company’s sale and leaseback would be termed as a capital lease.
The company if it goes for the operating lease would pay and the amount of the lease and would charge the stated expense as against the profit for each year but if it goes for the capital lease, then it would be entitled for the depreciation and also, the lease payment would be treated like a loan. So, double benefit in the case if the company goes for capital lease. So, it must go for capital lease.
References:
AASB 117 Leases. (2016). Charteredaccountants.com.au. Retrieved 7 October 2016, from https://www.charteredaccountants.com.au/Industry-Topics/Reporting/Australian-accounting-standards/Analysis-of-AASB-standards/AASB-117–Leases
AASB 1033 Presentation and Disclosure of Financial Instruments. (2016). www.aasb.gov.au. Retrieved 7 October 2016, from https://www.aasb.gov.au/admin/file/content102/c3/AASB1033_10-99.pdf
AASB 117. (2016). www.aasb.gov.au. Retrieved 7 October 2016, from https://www.aasb.gov.au/admin/file/content102/c3/AASB117_07-04_ERDRjun10_07-09.pdf
AASB 132. (2016). www.aasb.gov.au. Retrieved 7 October 2016, from https://www.aasb.gov.au/admin/file/content105/c9/AASB132_07-04_COMPapr07_07-07.pdf
Operating versus Capital Leases. (2016). Pages.stern.nyu.edu. Retrieved 7 October 2016, from https://pages.stern.nyu.edu/~adamodar/New_Home_Page/AccPrimer/lease.htm
Essay Writing Service Features
Our Experience
No matter how complex your assignment is, we can find the right professional for your specific task. Contact Essay is an essay writing company that hires only the smartest minds to help you with your projects. Our expertise allows us to provide students with high-quality academic writing, editing & proofreading services.
Free Features
Free revision policy
$10Free bibliography & reference
$8Free title page
$8Free formatting
$8How Our Essay Writing Service Works
First, you will need to complete an order form. It's not difficult but, in case there is anything you find not to be clear, you may always call us so that we can guide you through it. On the order form, you will need to include some basic information concerning your order: subject, topic, number of pages, etc. We also encourage our clients to upload any relevant information or sources that will help.
Complete the order form
Once we have all the information and instructions that we need, we select the most suitable writer for your assignment. While everything seems to be clear, the writer, who has complete knowledge of the subject, may need clarification from you. It is at that point that you would receive a call or email from us.
Writer’s assignment
As soon as the writer has finished, it will be delivered both to the website and to your email address so that you will not miss it. If your deadline is close at hand, we will place a call to you to make sure that you receive the paper on time.
Completing the order and download