Setter (6/13) (b)

Please accept my apologies for delay in responding - I needed to do some digging to confirm before responding. You should ignore the sentence "This would result in other income ..." and the following sentence (if it is still there - I don't have a current edition) "However, the amount recognised in the current year would be $nil ....". Both these sentences related to previous treatment under IAS 17 and are no longer relevant under IFRS 16. Sale and leaseback is quite a tricky area - but remember this is an audit exam not an accounting exam. So the issue has been simplified by having the transaction on the last day of the year - so there is no finance cost. To work out finance cost going forward we would need to be told what "rental" Setter is paying for the leaseback. Let's keep this simple - say Setter pays "rent" $3m at the end of each year for 20 years - that is actually the loan repayment. If after 20 years $37m has been repaid (presumably), the interest rate implicit in this arrangement is 5.1% (approx - you wouldn't be expected to calculate in AAA). So in the first year the interest expense/finance cost would be $37m x 5.1% = $1.887m. And at the end of the first year, the liability would be $35.887m (i.e. 37 + 1.887 - 3)

I found this https://www.compeer.com/Home/Educational-Opportunities/Tools-Calculators/Calculators/Loan-Amortization which is great for illustration: Enter 37000 in as the loan amount and 20 for payment term Select "Annual" for payment type Enter 5.1 for interest rate % Click "calculate" You'll see the payment schedule which splits the annual repayment between interest and principal. (Note in the box that the annual payment is $2,994 rather than $3,000 because 5.1% is my approximation.) You will see exactly what is meant by "amortisation" i.e. it is a process of gradually reducing a balance. At the end of the lease/loan period - 20 years - the financial liability has been settled in full - so $0 balance.

Please remember to start posts about new questions on new threads. It is NOT treated separately and it cannot be added to $60m (the amount of the loan received) when it is part of the payment schedule. It may help to think back to how to calculate IRR. For Setter I worked out the implicit rate by considering: A receipt now - $37m - DF is 1 - PV is $37 Annual payments in arrears for 20 years - $3m - for PV to be $37 (i.e. for NPV to be $0), the annuity factor for years 1-20 must = $37m/$3m = 12.333 I then looked this up in discount tables. In your new Q, what you have is: A receipt now - $60m - DF is 1 - PV is $60m Annual payments in arrears for 20 years - $3.6m per annum (i.e. 6% x $60m) But then at "T20" you also have a payment of the premium - $5m i.e. the payment at T20 will be $8.6m The only way to find the IRR when you have cash flows other than an annuity (as above) or perpetuity is to use linear interpolation - remember that? I have calculated it at 2.36%. So in the first year the finance cost will be $1.416m If the $5m is ignored (wrongly) the IRR would be calculated as only 1.81% (put it into the calculator I linked to my previous post).