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BonneSante S.A Case Solution
| Solution Id | Length | Case Author | Case Publisher |
|---|---|---|---|
| 561 | 761 Words (3 Pages) | David F. Hawkins | Harvard Business School : 111063 |
A Word File
The exposure draft requires the recognition of right-to-use of the underlying asset and lease payment liability in the financial statements at the commencement of the lease agreement by the lessee. In determining the right-to-use of the asset, the lessee can use the cost of the asset plus any initial direct costs incurred by the lessee. In the case of BonneSante, the right-of-use will include the cost of the leased trucks and the retail outlet space. In addition to this, any direct costs incurred by BonneSante will also form a part of the right-of-use of the asset and will be capitalized as an asset. Moreover, the lease payment liability would be comprised of the present value of the due payments discounted at the borrowing rate available to the lessee if the implicit rate of the lease is not determinable. Furthermore, the company would be required to determine the lease payment liability at the end of each year in addition to amortizing the right-of-use of the asset.
Following questions are answered in this case study solution:
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Using the Exhibit 1 data, prepare the lessee accounting illustrations Monet requested. How well do the chief accountant's assumed lease characteristics line up with the company's past lease term experience?
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As a potential BonneSnte investor or creditor, how would you view the liability for future lease payments BonneSante would have to record under the ED's lessee accounting proposals? Is it like regular bank debt? If not, what is it? Would you include at 100 percent of the recognied amount in debt-to-equity ratio?
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What role does management judgment play in determining the lessee right-of-use asset and lease liability amounts?
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How might the ED's proposed lessor accounting influence, if at all, the lessor's preferences for particular lease provisions in the BonneSante leases?
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Compared to your understanding of the IFRS lessee accounting rules in place in August 2010, do you believe the ED proposals represent a significant improvement? Explain.
BonneSante S A Case Analysis
2. As a potential BonneSnte investor or creditor, how would you view the liability for future lease payments BonneSante would have to record under the ED's lessee accounting proposals? Is it like regular bank debt? If not, what is it? Would you include at 100 percent of the recognied amount in debt-to-equity ratio?
According to the requirements of the exposure draft, the balance sheet of the company would show a long-term lease liability which would raise the apparent debt level of the company. Although the recognition of the liability comes with the recognition of the right-of-use asset as well, the long-term debt liability makes it raises the financial leverage of the company in front of potential investors. However, in reality, the company does not possess any long-term debt since all of the risks and rewards associated with the leased assets lied with the lessors. Nevertheless, the treatment of the lease contract is not like regular bank debt as it does not come with a right-of-use as in the case of the lease agreement.
Moreover, the whole amount of the lease payment liability will not be included in the calculation of debt-to-equity. According to the exposure draft, the present value of the expected lease payments that have a life of less than twelve months (one year) is treated as short term debt and hence will not be included in debt to determine debt-to-equity of the company.
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