Springfield Ltd. Case

Question 1

1. The sale and lease back arrangement of the Springfield ltd. Is a finance lease as though the asset contains a license which cannot be transferred but the lease term is for a major part of the economic life of the asset which considers it to be a finance lease and the title will never be transferred to the purchaser and the leasing of property in case of the Springfield Ltd. Is basically a form of financing as they have retained all risks and ownership with them hence it will be classified as the finance lease and thus the accounting treatment to be in accordance with finance lease. The lease of the power station is of specialized nature and it can be used by lessee only without adding or making major modifications. (Steven Bragg, 2015)
2. The sale and lease back transaction which results in the finance lease, the excess of the sale proceeds over the carrying amount should not be recognized immediately as the income by the seller that is lessee. The income should be amortized over the lease term that is being specified in the agreement. The lease back transaction is basically a form of financing in which the lessor is providing finance to the lessee in exchange of the security of the asset thus the excess amount over the carrying amount is not at all a income rather than it is to deferred over the lease term. There are two ways of accounting that are available with the lessee in regard to finance leases:

First case

1. Entry for recording sale

Debit Cash with sale price

Credit Non-current asset with carrying value

Credit deferred income

The deferred income is credited with the excess of sale price and the carrying value.

1. Recording the finance lease

Debit Non-current asset

Credit Finance lease liability with the lower of the fair value or the present value of the lease payments in future.

Second case

No entry is made in regard to the sale as it is just a secured loan and the asset will remain on the balance sheet and the sale proceeds are recorded as the loan and future lease payments will be considered for loan and interest.

Thus the accounting treatment is correct as Springfield ltd. Had deferred the income in the balance sheet and thus the income is amortized over the lease term of 20 years. (Australians Accounting Standards Board, 2010)

1. The deferred income and the profit will be credited to the income statements in proportion to the amortization over the lease term but as per the conceptual framework, the timing of recognizing the profit or loss is depending upon the condition that whether the seller had relinquished all the rights or just the minor rights of the use of the assets. And thus accordingly they will be recognized by way of deferment or with the immediate effect. If substantially all the rights in relation to the asset is transferred then the profit or loss is immediately recognized at the date of sale but if seller is retaining more than the minor part in relation to the asset then the profit that is in excess of the carrying amounts of the asset is to be recognized immediately at the date of the sale and the loss on the sale and lease back transaction is recognized immediately to the extent the carrying amount is greater than the fair value of the asset. Thus the deferred income account is different in comparison to the conceptual framework which provides for immediate recognition of the profit and losses and no deferment is there. (Whatheheckaboom, 2011)

Question 2

1. The non controlling interest is the ownership in the company which does not provide the shareholders with non controlling interest to control the company. Thus investor with non controlling interest ownership does not govern the financial and the operating policies of the subsidiaries in order to derive benefits from the working of the subsidiary. Thus the investors in the non controlling interest are just allocated net income and the share of equity in proportion to their share in the subsidiary. The shareholding of the non controlling interest shareholders is very much less in comparison to the shareholding of the parent company. As per the legal norms the investors in the non controlling interest category also has a right to participate in the decision making process of the company but their proportion is so less that they cannot influence the company with their ideas and the decisions of the majority are only considered at the general meetings of the company. Thus the right to vote in case of the non controlling shareholders is of no use and they cannot influence the company with their views and ideas. Thus in this case Qantas is holding the majority shareholding in the subsidiaries and the non controlling interests are just having the equity of $4 million which is just 0.068% of the total equity. Hence their share of ownership in company is very less and thus the shareholders in the non controlling interest category will not be able to influence the company with their decisions as the decisions in the company are taken on the basis of the majority votes. (Australian Accounting Standards Board, 2011)
2. The non-controlling interest shareholders are shareholders who are holding minority shares in the acquired company. As per the AASB 10 the share of non controlling interest is to be shown separately from the share of parent entity. NCI is considered as the key component in the head of equity at the time of consolidation of financial statements. Thus the value of the non controlling interest will represent the share of net assets that is not owned by the parent company in the subsidiary. The portion of the non controlling interest is to be recorded in accordance with the fair value of the identified assets and it is not to be calculated at the book value. The share of profit or loss attributable to the non controlling interest is to be entered in the column of the NCI thus total comprehensive income is to be allocated both to the parent and the non controlling interest. When the proportion of  holding of the non controlling interest shareholders changes then the changes are to be done in the accounts of the non controlling interests also in order to reflect their change of interest in the subsidiary. Thus no matter how small the amount of the equity is attributable to the non controlling interests, it is to be separately disclosed as it is an important part of the consolidated financial statements. Hence in this case NCI represents only $4 million of $5889 million total equity then also it is to be shown separately in the consolidated financial statements as a part of equity. (ASX Limited, 2015)

Question 3