Obtain the 2020 fiscal year financial statements for Saputo. Follow the steps given on pages 1 and 2 of this file. Find the paragraphs under the heading Property, Plant and Equipment in Note 3 Significant accounting policies. These appear on page 53 of the 2020 Annual Report. Also, find Note 7 Property, Plant and Equipment on page 63 in the 2020 Annual Report.

REQUIRED:

1. Summarize the main features of Saputos accounting for property, plant and equipment (PP&E) by reading the paragraphs in Note 3. Dont feel that you need to discuss every single sentence summarize the big picture. [In particular, dont worry about the term cash-generating unit]. Are Saputos policies appropriate under generally accepted accounting principles (GAAP)?

   What do you think rolling stock refers to? [This is not a technical accounting term.] Do you think the described depreciation approach is straight-line? If not, what type of depreciation is it?

   Why would assets held for sale and assets under construction not be depreciated?

2. Copy the first table at the top of Note 7 into your slides. This appears on page 63. Briefly explain how this table works. Identify the dollar amount that shows up on the Mar 31, 2020 consolidated balance sheet (statement of financial position).

   1. i) Why might an investor find this table helpful? That is, how does it expand on the information available in the balance sheet (statement of financial position)?

   2. ii) There are five columns in each table showing the detail of different asset categories (and then a total column). Which asset category has seen the higher proportion of its value used up at March 31, 2020?

3. A) Using the column for Furniture, machinery and equipment from the table, prepare journal entries to record each of the following events. In deciding the accounts that are affected in each entry, choose the most likely explanation for the change in a particular account balance:

   1. i) Additions of $381.0

   2. ii) Depreciation of $233.9

   3. iii) Disposals of (31.9) and (30.5) in the Cost and Accumulated depreciation sections respectively. Prepare a journal entry assuming that these amounts refer to equipment that was scrapped in the year (i.e. was not sold, as it was considered worthless).

B) Recall that Note 3 says the company depreciates its buildings over a useful life of between 15 and 40 years. Using the first table in Note 7, determine the AVERAGE cost of the Buildings over the fiscal year ending March 31, 2020. Make sure you use the Cost line, not the Net book value to do this. Also find the fiscal 2020 depreciation expense for buildings, which is found on the table in the same column

Calculate, Expected life in years = Average cost of the Buildings in fiscal 2020

for buildings Fiscal 2020 depreciation expense (buildings)

How would you interpret the result (which is measured in number of years)? Does your calculation fall within the range of 15 to 40 years? [Note: This is a simplified calculation, which assumes zero residual value for buildings.]

NOTE 3 SIGNIFICANT ACCOUNTING POLICIES (CONT'D) PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost less accumulated depreciation and any impairment losses and are depreciated using the straight-line method over their estimated useful lives as described below: Buildings Furniture, machinery and equipment Rolling stock 15 to 40 years 3 to 20 years 5 to 10 years based on estimated kilometers traveled Where components of an item of building or furniture, machinery and equipment are individually significant, they are accounted for separately within the categories described above. Assets held for sale are recorded at the lower of their carrying amount or fair value less costs to sell, and no depreciation is recorded. Assets under construction are not depreciated. Borrowing costs are capitalized to qualifying property, plant and equipment, if any, where the period of construction of those assets takes a substantial period of time to get ready for their intended use. Borrowing costs, if incurred, are added to the cost of those assets until such time as the assets are substantially ready for their intended use. For the purposes of impairment testing, property, plant and equipment are tested at the cash-generating unit (CGU) level. Write-downs, if any, are included in "depreciation and amortization or restructuring costs" in the consolidated income statements. RIGHT-OF-USE ASSETS AND LEASE LIABILITIES Leases are recognized as a right-of-use asset and a corresponding lease liability at the commencement date. Each lease payment is allocated between a reduction of the liability and finance cost. The finance cost is recognized in "Other financial charges" in the consolidated income statements over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. The lease liability is measured at the present value of lease payments to be made, discounted using the incremental borrowing rate at the lease commencement date if the interest rate implicit in the lease is not readily available. The period over which the lease payments are discounted is the non-cancellable period for which the lessee has the right to use the underlying asset together with the renewal options that the Company is reasonably certain to exercise. The period needs to also consider termination options that the Company is reasonably certain not to exercise. Renewal options are included in a number of leases across the Company. Lease payments include fixed payments less any lease incentives receivable, variable lease payments that depend on an index or a rate and amounts expected to be paid under residual value guarantees. The lease payments also include the exercise price of a purchase option reasonably certain to be exercised and payment of penalties for termination of a lease. Right-of-use assets are measured at cost, which is calculated as the amount of the initial measurement of lease liability plus any lease payments made at or before the lease commencement date, any initial direct costs and related restoration costs. The right-of-use asset is depreciated over the shorter of the asset's useful life and the lease term on a straight-line basis. If a lease transfers ownership of the underlying asset or the cost of the right-of-use asset reflects that the Company expects to exercise a purchase option, the related right-of-use asset is depreciated over the useful life of the underlying asset. The depreciation starts at the commencement date of the lease. Payments associated with short-term leases and leases of low-value assets are recognized on a straight-line basis as an expense in the consolidated income statements. ANNUAL REPORT 2020 - 53 NOTE 7 PROPERTY, PLANT AND EQUIPMENT - For the year ended March 31, 2020 Furniture, machinery and Rolling Land Buildings equipment stock Leases Total Cost As at March 31, 2019 $ 119.3 $ 1,232.4 $ 3,389.7 $ 18.7 $ 39.1 $ 4,799.2 Adjustment on initial application - IFRS 16 (Note 3) (2.1) ) (39.1) (41.2) Business acquisitions (Note 18) 64.0 108.5 375.2 547.7 Additions 25.7 103.1 381.0 0.1 509.9 Disposals (1.1) (14.1) (31.9) (2.4) (49.5) Transfers (1.5) 1.3 22.3 22.1 Foreign currency and hyperinflation adjustments (3.0) 11.7 57.7 (1.1) 65.3 As at March 31, 2020 $ 203.4 $ 1,442.9 $ 4,191.9 $ 15,3 $ $ 5,853.5 Accumulated depreciation As at March 31, 2019 $ $ 336.1 $ 1,352.6 $ 10.5 $ 4.6 $ 1,703.8 Adjustment on initial application - IFRS 16 (Note 3) (1.7) (4.6) (6.3) Depreciation 57.1 233.9 2.2 : 293.2 Disposals (7.9) (30.5) (2.1) (40.5) Foreign currency and hyperinflation adjustments 10.5 43.5 (0.7) 53.3 As at March 31, 2020 $ $ 395.8 $ 1,597,8 $ 9.9 $ $ 2,003.5 Net book value at March 31, 2020 $ 203.4 $ 1,047.1 $ 2,594,1 $ 5.4 $ $ 3,850.0 Depreciation includes impairment of assets related to plant closure (Note 24) The net book value of property, plant and equipment under construction amounts to $362.1 million as at March 31, 2020,($276.9 million as at March 31, 2019) and consists mainly of machinery and equipment In the third quarter of fiscal 2019, the Company realized a gain on disposal of assets of $194.5 million ($167.8 million after tax) relating to the sale of its facility in Burnaby, British Columbia. The Company sold the facility for $209.0 million, and provided a vendor take-back (VTB) mortgage in the amount of $50.0 million (Note 10). The VTB mortgage bears interest at a rate of 3% per annum and matures in fiscal 2022, where the full amount of capital will be repaid. The Company has entered into a lease agreement for the Bumaby facility until the construction of the new facility is completed, which is expected to be in fiscal 2021. ANNUAL REPORT 2020 - 63 - NOTE 3 SIGNIFICANT ACCOUNTING POLICIES (CONT'D) PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost less accumulated depreciation and any impairment losses and are depreciated using the straight-line method over their estimated useful lives as described below: Buildings Furniture, machinery and equipment Rolling stock 15 to 40 years 3 to 20 years 5 to 10 years based on estimated kilometers traveled Where components of an item of building or furniture, machinery and equipment are individually significant, they are accounted for separately within the categories described above. Assets held for sale are recorded at the lower of their carrying amount or fair value less costs to sell, and no depreciation is recorded. Assets under construction are not depreciated. Borrowing costs are capitalized to qualifying property, plant and equipment, if any, where the period of construction of those assets takes a substantial period of time to get ready for their intended use. Borrowing costs, if incurred, are added to the cost of those assets until such time as the assets are substantially ready for their intended use. For the purposes of impairment testing, property, plant and equipment are tested at the cash-generating unit (CGU) level. Write-downs, if any, are included in "depreciation and amortization or restructuring costs" in the consolidated income statements. RIGHT-OF-USE ASSETS AND LEASE LIABILITIES Leases are recognized as a right-of-use asset and a corresponding lease liability at the commencement date. Each lease payment is allocated between a reduction of the liability and finance cost. The finance cost is recognized in "Other financial charges" in the consolidated income statements over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. The lease liability is measured at the present value of lease payments to be made, discounted using the incremental borrowing rate at the lease commencement date if the interest rate implicit in the lease is not readily available. The period over which the lease payments are discounted is the non-cancellable period for which the lessee has the right to use the underlying asset together with the renewal options that the Company is reasonably certain to exercise. The period needs to also consider termination options that the Company is reasonably certain not to exercise. Renewal options are included in a number of leases across the Company. Lease payments include fixed payments less any lease incentives receivable, variable lease payments that depend on an index or a rate and amounts expected to be paid under residual value guarantees. The lease payments also include the exercise price of a purchase option reasonably certain to be exercised and payment of penalties for termination of a lease. Right-of-use assets are measured at cost, which is calculated as the amount of the initial measurement of lease liability plus any lease payments made at or before the lease commencement date, any initial direct costs and related restoration costs. The right-of-use asset is depreciated over the shorter of the asset's useful life and the lease term on a straight-line basis. If a lease transfers ownership of the underlying asset or the cost of the right-of-use asset reflects that the Company expects to exercise a purchase option, the related right-of-use asset is depreciated over the useful life of the underlying asset. The depreciation starts at the commencement date of the lease. Payments associated with short-term leases and leases of low-value assets are recognized on a straight-line basis as an expense in the consolidated income statements. ANNUAL REPORT 2020 - 53 NOTE 7 PROPERTY, PLANT AND EQUIPMENT - For the year ended March 31, 2020 Furniture, machinery and Rolling Land Buildings equipment stock Leases Total Cost As at March 31, 2019 $ 119.3 $ 1,232.4 $ 3,389.7 $ 18.7 $ 39.1 $ 4,799.2 Adjustment on initial application - IFRS 16 (Note 3) (2.1) ) (39.1) (41.2) Business acquisitions (Note 18) 64.0 108.5 375.2 547.7 Additions 25.7 103.1 381.0 0.1 509.9 Disposals (1.1) (14.1) (31.9) (2.4) (49.5) Transfers (1.5) 1.3 22.3 22.1 Foreign currency and hyperinflation adjustments (3.0) 11.7 57.7 (1.1) 65.3 As at March 31, 2020 $ 203.4 $ 1,442.9 $ 4,191.9 $ 15,3 $ $ 5,853.5 Accumulated depreciation As at March 31, 2019 $ $ 336.1 $ 1,352.6 $ 10.5 $ 4.6 $ 1,703.8 Adjustment on initial application - IFRS 16 (Note 3) (1.7) (4.6) (6.3) Depreciation 57.1 233.9 2.2 : 293.2 Disposals (7.9) (30.5) (2.1) (40.5) Foreign currency and hyperinflation adjustments 10.5 43.5 (0.7) 53.3 As at March 31, 2020 $ $ 395.8 $ 1,597,8 $ 9.9 $ $ 2,003.5 Net book value at March 31, 2020 $ 203.4 $ 1,047.1 $ 2,594,1 $ 5.4 $ $ 3,850.0 Depreciation includes impairment of assets related to plant closure (Note 24) The net book value of property, plant and equipment under construction amounts to $362.1 million as at March 31, 2020,($276.9 million as at March 31, 2019) and consists mainly of machinery and equipment In the third quarter of fiscal 2019, the Company realized a gain on disposal of assets of $194.5 million ($167.8 million after tax) relating to the sale of its facility in Burnaby, British Columbia. The Company sold the facility for $209.0 million, and provided a vendor take-back (VTB) mortgage in the amount of $50.0 million (Note 10). The VTB mortgage bears interest at a rate of 3% per annum and matures in fiscal 2022, where the full amount of capital will be repaid. The Company has entered into a lease agreement for the Bumaby facility until the construction of the new facility is completed, which is expected to be in fiscal 2021. ANNUAL REPORT 2020 - 63