Sale and leaseback

Generally 1 mark for each matter considered/evidence point explained:

Matters:
– Asset is material (calculation)
– On disposal the asset should be re-measured to fair value
– Apparent profit should be deferred and amortised
– Accounting treatment currently not correct
– Discuss materiality of adjustments needed
– Implication for auditor’s opinion
– Treatment as a finance lease appears correct 
Evidence:
– A copy of the lease to confirm that the arrangement is a finance lease
– Physical inspection of the property complex 
– A copy of insurance documents
– Confirmation of the fair value of the property complex, possibly using an auditor’s expert
– Agreement of the $37 million cash proceeds to bank statement and cash book
– A schedule showing the adjustment required in the financial statements
– Minutes of a discussion with management regarding the accounting treatment and including an auditor’s request to amend the financial statements

Maximum marks 7