Advanced Financial Accounting Report: Lion Nathan Case Study

This report provides an in-depth analysis of advanced financial accounting principles, specifically focusing on the sale and leaseback transactions. It begins by exploring the benefits of sale and leaseback arrangements, such as capital attainment and tax advantages, as illustrated by the Lion Nathan case study. The report then distinguishes between finance and operating leases, highlighting the implications of each for financial strategy, particularly within the context of Lion Nathan's Victoria strategy. Furthermore, it examines the accounting treatment of profit or loss in sale and leaseback scenarios, referencing AASB 117 and emphasizing that gains should be deferred and amortized over the leasing period. Finally, the report discusses the accounting changes required for building depreciation in financial leases, in accordance with AASB 138 and AASB 116, detailing how depreciation should be handled during the sale and leaseback process and throughout the asset's useful life. This report is a comprehensive guide to the accounting standards and practical implications of sale and leaseback arrangements.

Running head: ADVANCED FINANCIAL ACCOUNTING
Advanced Financial Accounting
Name of the Student
Name of the University
Author note

1ADVANCED FINANCIAL ACCOUNTING
Table of Contents
Answer a..........................................................................................................................................2
Benefits of sale and leaseback.....................................................................................................2
Answer b..........................................................................................................................................2
Type of leasing............................................................................................................................2
Answer c..........................................................................................................................................3
Accounting profit or loss.............................................................................................................3
Answer d..........................................................................................................................................4
Changing in the way of accounting for building depreciation....................................................4
Reference.........................................................................................................................................5

2ADVANCED FINANCIAL ACCOUNTING
Answer a
Benefits of sale and leaseback
In accounting, ‘sales and leaseback’ is considered as a quick way to build up funds. In
this process, financial entity continues with is ownership right even after selling out of the
property by immediate leaseback (Longinidis and Georgiadis 2014). Four primary benefits that
could be identified from Lion Nathan case study are- attainment of capital at a lower borrowing
rate, no recorded agreement in financial balance, maintenance of asset controlling and receiving
benefit of taxation from leasing expenditure.
When Lion Nathan sorts to adapt Sales and Leaseback procedure then the concerned
corporation will be able to retain its control over pubs. The operating activities of the pub remain
unaffected with this kind of trading. No matter whether the ownership retain in the form of
original owner or as a lessee, it enhances the bargaining power. In times of financial leasing,
payment of interest and depreciation of fixed capital are considered as operational expenses and
hence, this tends to increase tax protection and generate a higher net profit. Similarly, payment of
lease in the process of operating lease is also viewed as a part of financial expense (Ashiya
2015). The prior knowledge base of the property helps the owners of Lion Nathan to have an
additional edge of benefit while negotiating on lease payment. There is no long-term liability of
the company as reflected from solvency performance.

3ADVANCED FINANCIAL ACCOUNTING
Answer b
Type of leasing
Australian Accounting Standard AASB 117 defines lease as an agreement where a
property owner termed as lessor provides right to another person known as lessee to access the
asset for a certain period on account of a agreed payment. Finance leases differs from operating
lease in terms of transferring all associated risk and benefits from original owner to lessee
(Deegan 2016) . In financial leasing, lessee enjoys the right to have possession on the asset even
after completion of lease period.
Given the case of Lion Nathan, it considers market expansion by selling one third of its
portfolios for funding acquisition of hotels over a period ranging between twelve to eighteen
months in Victoria. The operation of hotels is a part of company’s Victoria strategy. It means the
company retains its ownership and control over their main venture that is portfolios of pub. Lion
Nathan conducts proper financial leasing for assuring shareholder’s profit and obtains all the
benefits from pub’s operation. Once the Victoria strategy completes it owns back all is property
rights.
In this context, financial lease is the most suitable way to fulfill the strategy of Lion
Nathan.
Answer c
Accounting profit or loss
In reference to AASB 117 (Paragraph 59), it is indicated that in situation where the sales
of pub generates any prospective gain or loss for Lion Nathan, then it should not be recognize

4ADVANCED FINANCIAL ACCOUNTING
immediately (Henderson et al. 2015). Rather it would be deferred and amortized over the leasing
period. In financial leaseback, Pubs are used as a source of raising capita and hence is viewed as
providing security rather than completely sold. The accounting standard thus indicates that it is
not right to consider benefits from sells of non-current assets as an income. As an instance, if the
concerned firm engages in a lease contract over one year using the method of straight line then
gains from the leasing contract can be equally divided over the leasing term (Chambers 2014). In
such sales and leaseback activities as mentioned in Lion Nathan case above, the company should
account gains obtained from selling of pubs before it occurs in the comprehensive income
statement.
Answer d
Changing in the way of accounting for building depreciation
In a financial lease, AASB 117 requires that all benefits and risks should be transferred to
the lessee. The measures for depreciation and disclosure of it should be in line with the
requirement of AASB 138 and AASB 116 (Collier 2015). This implies assets in leasing contract
should be depreciated over the term of leasing depending upon the ownership of lessee.
In reference to this, the accounted depreciation of building for Lion Nathan should be
separated in two processes. At times of selling, the cumulative depreciation amount for building
is closed to its carrying amount. It needs withdrawal from the financial position statement. In
case, where the firm sustain its ownership on the building then asset depreciation should be
accounted for the entire useful life instead of only for leasing term. The annual depreciation
expenditures that are recalculated after the end of financial year is subject to disclosure of
comprehensive income statement in the next year.

5ADVANCED FINANCIAL ACCOUNTING

6ADVANCED FINANCIAL ACCOUNTING
Reference
Ashiya, N., 2015. Determinants of Potential Seller/Lessee Benefits in Sale–Leaseback
Transactions. International Real Estate Review, 18(1), pp.89-112.
Chambers, R.L. ed., 2014. An accounting thesaurus: 500 years of accounting. Elsevier.
Collier, P.M., 2015. Accounting for managers: Interpreting accounting information for decision
making. John Wiley & Sons.
Deegan, C., 2016. Financial accounting. McGraw-Hill Education Australia.
Henderson, S., Peirson, G., Herbohn, K. and Howieson, B., 2015. Issues in financial accounting.
Pearson Higher Education AU.
Longinidis, P. and Georgiadis, M.C., 2014. Integration of sale and leaseback in the optimal
design of supply chain networks. Omega, 47, pp.73-89.