Refer
to the 2009 year-end financial statements and accompanying notes of Eastern
Platinum Limited (Eastplats) at the end of this volume, and then answer the
following questions about the company. (Note that Eastplats follows IFRS.)
Instructions
(a)
Review the notes and determine how Eastplats accounts for its leasing
transactions. Is Eastplats the lessor or lessee and what types of leases does
it have?
(b)
Identify all accounts on the consolidated statements of financial position and
the consolidated income statement, along with their dollar amounts, that relate
to any lease agreements that the company is a party to. Explain briefly what
each lease agreement covers.
(c)
Identify the line account(s) on the Consolidated Statements of Cash Flows where
the cash lease payments are reported. Explain your answer.
(d)
Calculate Eastplats’s return on total assets and total debt-to-equity ratios
for 2009.
(e)
Assume the IASB develops a revised lease accounting standard using the
contract-based approach. Would there be any impact to the financial statement
of Eastplats? If so, what would the impact be?
(a) At the beginning of Note 1,
“Summary of Significant Accounting Policies”, it’s stated that “Eastern is a
platinum group metal producer involved in the mining, development and
exploration of properties in South Africa.
(b) From Note 3(e), we see that
Eastern has rental income from residential properties which is recognized on a
straight-line basis over the term of the lease.
These would be operating leases for which Eastern is the lessor. As described in Note 3 (r)(i), any direct
costs incurred in negotiating these leases is added to the value of these
properties and depreciated over the term
of the lease on a straight-line basis.
Note 3(k)(ii) identifies that
Eastern has leased assets. These assets
represent finance leased assets which are recorded at the lower of fair value
and the present value of the lease obligations at the inception of the lease. These leased assets are amortized and tested
for impairment. As further explained in
Note 3 (r)(ii), Eastern recognizes finance charges on the lease obligations
into net earnings.
Finally, Eastern is also a
lessee under operating leases as described in Note 3(r)(ii). Under these types of leases, the lease
payments are expensed on a straight-line basis over the term of the lease. Any incentives received at the beginning of
the lease are recognized over the lease term into income.
Note 12 provides the details
of the lease obligations and payment terms.
The finance leases relate to mining vehicles and are for 5 years, with
payments half yearly in advance with the vehicles being security for the
leases. The interest rate is the South
African prime rate plus 1%. These leases
are repayable in 3 annual payments with a top up payment due in December
2011. The present value of these leases
is US$3.776 million. Note 19 also indicates that finance charges on these
leases totalled US$377 thousand during 2009.
Although the company has operating leases,
there were no commitments noted for these leases. Only the finance lease commitments are
disclosed in the notes.
(c) On the statement of financial position, we can
see current portion and non-current portion of the finance leases. These leases are for the mining vehicles that
are included in property, plant and equipment.
As detailed in Note 3(w)(iii), these mining leased assets are
depreciated over 5 years, which ties into the lease term. Also included in property, plant and
equipment are the residential properties that are leased and for which Eastern
is the lessor. On the income statement,
there is rental income, which has not been separately shown on the face of the
statement and may be included in revenue or netted with some other number. We also know that included in finance charges
is the interest on the finance leases of US$377 thousand. Finally, included in the depletion and
depreciation expense is depreciation on residential properties of US$111
thousand and on the mining leased assets of US$1.112 million (from Note 8).
(d) Lease payments for finance leases are included
in two types of activities on the statement of cash flows: operating activities
and financing activities. The portion that represents interest expense is
reported in “finance costs paid” of US$69 and there is an add back of the
finance costs expense (which includes the interest expense on these finance
leases of US$1.691 million. Also
included in operating activities would be the operating lease costs paid and
the rental income received on operating leases related to the residential
properties. Under financing activities, the repayment on finance lease
obligations representing the reduction of principle of US$1.223 million is
shown.
Under Note 8,
there are no new additions to plant and equipment leased, so there were no new
finance leases entered into during 2008 or 2009.
(e) in thousands of US$
|
|
Dec. 31, 2009
|
|
Net income
|
$ 1,222
|
|
Total assets
|
706,850
|
|
Return on total assets
|
0.17%
|
|
|
|
|
Total liabilities
|
77,338
|
|
Shareholders’ equity
|
629,512
|
|
Total debt-to-equity ratio
|
0.12
|
(f) Under the contract based approach, the asset
that is acquired by a lessee is not the physical property that is leased;
rather, it is an intangible asset that represents the right to use the asset
that is conveyed under the lease agreement. The liability is the contractual
obligation to make lease payments. In
the case of the lessor, a lease receivable would be set up with an offsetting
performance obligation. In both cases,
the asset and the obligation are initially recorded at the present value of the
lease payments. For the lessee, the
intangible asset is then amortized over the term of the lease on some
systematic basis to earnings, and obligation is reduced by payments less the
interest charge.
For a lessor, the lease
receivable would be reduced by lease payments less related interest earned, and
the performance obligation would be reduced to net income over the term of the
lease and would represent rental revenue.
There also would still be depreciation on the assets that are being
leased.
In the case of Eastern, we will look at each of the leases
individually:
1. Finance leases for the mining assets – Since
the company already shows an obligation for these leases, the only change would
be to represent the leased assets as a right under intangible assets, rather
than as property, plant and equipment, This would result in moving the carrying
value of the property leased of US$2,441 thousand to intangible assets and out
of PP&E.
2. Leases on the residential properties -
Eastern is the lessor– In this case, if the leases are for longer than one
year, the lease receivable and the related performance obligation should be
recorded on the statement of financial position. However, the company does not disclose the lease
payments and terms for these leases, so no adjustment can be made.
3. Other operating leases as lessee - Again,
under the contract based approach, the company would record leases that are
longer than one year, as an intangible asset recognizing the right to use the
asset and an offsetting obligation to make contractual payments. These amounts would reflect the present value
of the lease payments to be made.
However, once again, there is no disclosure of any commitments related
to these leases and so no adjustment can be made.
