Case Assignment 2: Goodbuy Drugs Ltd
To: Audit Committee
Re: Goodbuy Drugs Ltd’s (GDL) 2012 Analysis Report for Audit Meeting
This report has been prepared for the audit committee’s review and summarizes the 2012 accounting issues that GDL faces. It includes an analysis of the revised basic & diluted EPS calculations based on the recommendations.
COMPANY BACKGROUND AND CONSTRAINTS
GDL is a public company with operations in drug & food product retail as well as real estate. GDL’s shares are traded on the public market and follows IFRS reporting standards. It reports basic & diluted EPS before & after tax & capital gain for Y/E Dec 31 and emphasizes its …show more content…
3. Lease agreement with Sisson REIT
Based on a set of criteria IFRS allows leases to be accounted for in two ways depending upon the terms of the lease. If the terms indicate substantial transfer control/ownership, if the lease term is equivalent to or longer than the economic life of the property, or if the minimum lease payments allow the lessor to recover the costs, the lease is treated as a capital lease. If not, it is treated as an operating lease.
Alternative 1: Treat it as a capital lease. GDL would account for the transaction as if it has purchased an asset through long-term debt. It would recognize an asset and a liability at the lower of (1) the present value of the lease payments or (2) the fair value of the leased asset at the lease’s inception. The rental payments made by the lessee are then accounted for as a repayment of principal and interest on loan balance.
Alternative 2: Treat it as an operating lease. Neither the leased asset nor the obligation to make lease payment is recognized in the books. It is treated as an executory contract and the lease payments are treated as rent expense.
Recommendation: Since the given information does not satisfy any of the above said criteria, it is recommended to account for the