CEC Africa Investments Limited (CECA) was established in early 2013 as a pan-African company with a mandate to develop, finance and operate power projects across Sub-Saharan Africa. Sponsored by one of Africas most successful private utilities (CEC Plc from Zambia), CECA was set up to leverage indigenous talent in the power sector and bring about the necessary capital to assist in building Africas energy platform. CEC was incorporated under a Category 1 Global Business License company in Mauritius and is determined to follow latest international financial reporting standards (IFRSs).The summary of the financial overview for the last five years up to 2019 is shown below. FIVE-YEAR REVIEW In thousands of USD 2019 2018 2017 2016 2015 INCOME STATEMENT Revenue 421,203 389,532 354,626 355,063 291,948 EBITDA 110,227 101,471 92,419 79,951 60,603 Operating profit/ (loss) 92,182 79,579 (80,218) 68,351 50,135 Net finance costs (1,873) (4,451) (6,987) (7,276) (2,010) Share of profits from joint ventures (92) 448 1,841 Profit/ (loss) before tax 90,304 75,128 (87,205) 61,075 48,125 Taxation (34,448) (26,750) (26,482) (21,550) (14,520) Net profit/ (loss) attributable to equity holders of the Company 55,856 48,378 (113,687) 39,525 33,605 Headline earnings attributable to shareholders 0.034 0.030 (0.070) 0.024 0.022 STATEMENT OF FINANCIAL POSITION Property, plant and equipment 441,967 437,533 418,534 400,434 231,289 Investment in Subsidiaries - 19,029 17,635 31,098 27,744 Total non-current assets 441,969 455,619 436,170 550,282 380,613 Current assets 200,101 182,426 149,168 171,372 161,615 Total assets 642,070 619,960 585,338 721,654 542,228 CASH FLOW Net cash inflow/ (outflow) from operating activities 75,978 74,112 58,371 47,736 28,033 Net cash outflow from investing activities (16,002) (15,564) (8,177) (25,192) (56,610) Net cash (outflow)/ inflow from financing activities (40,520) (36,020) (44,904) (15,536) 57,551 Net cash increase/ (decrease) for the year 18,556 22,528 5,290 7,008 33,974 RATIOS AND STATISTICS Earnings Earnings per share 0.034 0.030 (0.070) 0.024 0.022 Headline earnings per share Dividend per share 0.016 0.013 0.010 0.009 0 Dividend cover 1.9 2.3 (6.9) 2.8 0 Profitability Operating margin 13% 12% (32%) 11% 12% Return on capital employed 17% 15% (23%) 11% 12% Return on equity attributable to shareholders 15% 14% (38%) 10% 12% Financial Net debt to equity 16% 21% 29% 27% 36% Current ratio 1.91 1.88 1.63 1.59 1.44 Liquidity ratio 1.88 1.85 1.59 1.57 1.41 After the analysis of detailed financial statement you have come across the transaction involving one of the machines being used by CEC in the production plant which was leased from ZESCO. ZESCO leased this new asset to CEC under a 5-year, non-cancellable contract starting January 1, 2018. Terms of the lease require payments of $485,550 each January 1, starting January 1, 2018. The machine has an estimated life of 7 years. The estimated guaranteed value is $600,000 while the residual value is expected to be $450,000 at the end of the lease term. No bargain purchase or renewal options are included in the contract, and it is not a specialized asset. CEC and ZESCO s financial year end is at December 31 all the risks and rewards of the machine are for ZESCO. The interest rate implicit in the lease 8% .CEC depreciates similar assets using straight-line .You have noticed that CEC has accounted for this lease as an operating. Required a) Citing relevant accounting standards explain why CEC might have accounted for this as an operating lease. And show the journal entry that was recorded by CEC in 2018 and 2019 b) Assuming that in 2018 CEC went for the early adoption of the new IFRS 16 lease standard. Discuss the accounting treatment that should have applied by the CEC on this lease contract. c) Prepare all the entries relating to the treatment in(b) for the years 2018 and 2019 that CEC should record. d) Citing relevant accounting standards and using supporting figures explain how and why the 2017 financial statements will be affected by this early adoption. e) With the help of supporting figures, explain the effect that this adoption will have on the above income statement and above statement of financial position extract for the years 2018 and 2019 f) With the help of supporting figures explain the effect that this adoption will have on the above cash flowextract for the years 2018 and 2019 g) State the ratios which will be affected by the above adoptions and explain whether the ratio will increase or decrease