Miles has asked you as a spring intern working in GHL to redraft these financial statements and he is concerned with the following issues that may affect the statement of financial position of GHL:

(i) On 1 April 2019 GHL purchased an equipment and simultaneously leased it to SG Health Services Ltd (SHS), an unrelated company in Singapore, on the following terms:

Lease term (with no cancellation clause)	5 years
Remaining useful life of the equipment	7 years
Carrying amount and fair value of the equipment at 1 April 2019	$918,124
Annual instalment receivable in arrears	$225,000
The interest rate implicit in the lease (per annum)	10%
Residual value guaranteed by SHS at 31 March 2024	$91,500
Expected residual value at 31 March 2024	$105,000

GHL has treated the contract as an operating lease and recognized lease rental income of $225,000. Depreciation of $131,161 has been charged to the statement of profit or loss.

(ii) At 1 April 2019, there was a deferred tax liability of $6.6 million in the statement of financial position and no adjustments have been made to this figure at 31 March 2020. This deferred tax liability was solely in relation to the differences between the carrying amount ($90 million) and the tax based ($57 million) of plant and equipment. At 31 March 2020, these figures were $96 million and $54 million respectively for the carrying amount and tax base of plant and equipment. The applicable income tax is 20%. GHL accounts for plant and equipment using cost model under HKAS 16 Property, Plant and Equipment.

The first tax loss carried forward in respect of the year ended 31 March 2020 is $24 million. GHL has reliable budgets for a total taxable profit of $12 million for the next two financial years. Tax losses can be carried forward indefinitely under the tax law. Fanny used the full amount of tax loss to determine the deferred tax amount and has been reflected in the draft financial statements.

(iii) On 31 March 2020 GHL issued $15 million 5% convertible bonds at par. Interests on the bonds are payable annually in arrears with the first payment on 31 March 2021. Issue costs payable to professional advisers were $600,000. The bond can, at the choice of the holders, be redeemed at par on 31 March 2023; or converted on 31 March 2023 into ordinary shares in GHL at the rate of three ordinary shares for every $10 bond held. In the draft financial statements, the proceeds from the bond issue have been recognized as bonds payable. The issue costs have been classified as an administrative expense. Cash received and paid has been recognized. No other entries have been made. The prevailing market interest rate for similar bonds for equivalent risk, but without conversion rights, is 8% per annum.

(iv) On 1 April 2019, GHL entered into a sale and leaseback agreement for its manufacturing plant. The plant was originally acquired by GHL on 31 March 2009 for $8,910,000, at which point the plant had a useful life of 30 years with no residual value. The sale proceeds of the plant from the sale and leaseback agreement were $11.25 million, which is higher than the fair value of the plant of $9.0 million. The plant was leased back on a 20-year lease from 1 April 2019 at an annual rental of $1,105,350 to be paid annually in arrears at 31 March 2020. The sale satisfies HKFRS 15 Revenue from Contracts with Customers, however, she insisted to account for it as a financing arrangement. The first lease rental is paid and charged to the statement of profit or loss. The sales proceed was treated as a financial liability. The incremental borrowing rate is 15% per annum.

(v) GHL purchased a factory site in Malaysia on 1 April 2019 with the intention for industrial use. Land prices in the area had increased significantly in the years immediately prior to 31 March 2020. Nearby sites had been acquired and converted into residential use. It is felt that, should the GHLs site also be converted into residential use, the factory site would have a market value of $27 million. $1.5 million of costs are estimated to be required to demolish the factory and to obtain planning permission for the conversion. GHL was not intending to convert the site at 1 April 2019 and had not sought planning permission at that date. The current replacement cost and the carrying amount of the factory site is correctly calculated as $25.1 million and $28 million respectively as at 31 March 2020 before revaluation. Fanny did not reflect the change in fair value of the factory site even the factory site is measured using the revaluation model under HKAS 16.

Required:

a) You need to write a report to the chief executive officer of GHL, Miles Johnson addressing his queries (1) to (5) below with explanations:

1) identify the classification of the lease with the reason for the lease entered by GHL in accordance with HKFRS 16? (6 marks)

2) under what conditions would deferred taxes need to be reported in the financial statements. Explain why an applicable tax rate and average effective tax rate numerical reconciliation and the major elements of tax expense or income are required to be included in the disclosure in accordance with HKAS 12 Income Taxes. (6 marks)

3) why split accounting should be used for the recognition of the debts with conversion characteristic in accordance with HKAS 32 Financial Instruments: Presentation? (6 marks)

4) what is the requirement of a sale and leaseback transaction from the seller-lessee perspective in accordance with HKFRS 16? (6 marks)

5) discuss the approach described in HKFRS 13 Fair Value Measurement to measure the non-financial asset. (6 marks)

b) Prepare necessary adjusting entries to correct the errors prepared by Fanny on all issues (i) to (v) identified by Miles in the financial statements of GHL for the year ended 31 March 2020 in accordance with relevant HKFRSs. (30 marks)