a. You have recently started an internship at an investment fund. Currently, the Warehouse accounts for leases using NZ IAS 17, as opposed to the new lease standard NZ IFRS 16. Accordingly, they have disclosed the information below for operating leases (i.e. leases that are not capitalised), which are all for retail buildings. The Warehouse has also recently issued bonds that pay 5.30% interest, but has older bonds that pay 6.0% interest.

Your supervisor has asked you to consider the effect of NZ IFRS 16 on the Warehouses financial statements and thus valuation, by capitalising the operating leases. To do so, first fill in the lease template below. You will need to calculate the opening lease liability as the present value of minimum lease payments. (Hint: You can modify the excel template for the lecture example to calculate this). Remember to justify your choices made for your answer b. Record the journal entries relating to the lease in 2019 (i.e. Year 1) not including the issuance of the lease. The Warehouse depreciates buildings over a 50 year life.

c. The information below is from the Warehouses 2019 annual report. Show the effect on the financial statements by recalculating the ROA (EBIT divided by total assets), and debt to total assets (total liabilities divided by total assets) for what they would be if the lease was capitalised (i.e. that the Warehouse has recorded what you calculated in a. and b. rather than recording it as an operating lease).

Total Assets = $1,050,821

Total Liabilities = $568,788

EBIT = $102,943

d. Whilst reading the annual report you notice the below comment in the notes:

Using this information, and your above answers, explain to your manager how you expect the Warehouse share price to change.

Operating leases The Group's non-cancellable operating leases mainly relate to building occupancy leases and typically expire within ten years. The leases have varying terms, escalation clauses and renewal rights. On renewal, the terms of the leases are renegotiated. Commitments for minimum lease payments in relation to non- cancellable operating leases at balance date are as follows: Future minimum rentals payable 0-1 years 1-2 years 2-5 years 5+ years Operating leases 2019 $000 127,142 108,034 240,375 185,957 661,508 2018 $000 121,473 107,531 249,550 234,207 712,761 he introduction of the new NZ IFRS lease accounting standard (refer note 2010), which is effective for the Group from the 2020 financial year will significantly increase book gearing as operating lease liabilities will be recorded on the balance sheet. This new standard is non-cash in nature and for Internal purposes and for testing debt covenant compliance with our external funding providers these new lease liabilities and the associated interest expense will be excluded from our internal gearing and debt covenant calculations Operating leases The Group's non-cancellable operating leases mainly relate to building occupancy leases and typically expire within ten years. The leases have varying terms, escalation clauses and renewal rights. On renewal, the terms of the leases are renegotiated. Commitments for minimum lease payments in relation to non- cancellable operating leases at balance date are as follows: Future minimum rentals payable 0-1 years 1-2 years 2-5 years 5+ years Operating leases 2019 $000 127,142 108,034 240,375 185,957 661,508 2018 $000 121,473 107,531 249,550 234,207 712,761 he introduction of the new NZ IFRS lease accounting standard (refer note 2010), which is effective for the Group from the 2020 financial year will significantly increase book gearing as operating lease liabilities will be recorded on the balance sheet. This new standard is non-cash in nature and for Internal purposes and for testing debt covenant compliance with our external funding providers these new lease liabilities and the associated interest expense will be excluded from our internal gearing and debt covenant calculations