(a) As indicated in note 3 (o) of Shoppers’ financial statements, the Company leases most of its store locations and office space. Leases that transfer substantially all the risks and benefits of ownership are recorded as financing leases, and are included with property and equipment, accounts payable and accrued liabilities and other long-term liabilities as applicable. All other leases are considered operating leases and the related rent is expensed on a straight-line basis over the term of the lease, any rent-free periods are also amortized on a straight-line basis. Landlord inducements are also deferred and amortized on a straight-line basis and reduce rent expense.
The Company has sale-leaseback arrangements for some of its stores. The leases are accounted for as financing or operating based on their nature. Any gains realized on disposal of sale-leasebacks that are financing in nature, are deferred and amortized on a straight-line basis over the shorter of the estimated useful life of the leased asset and the lease term. Executory costs, such as payments for real estate taxes, maintenance and insurance are expensed in the period to which they relate.
(b) As discussed in part (a) above, leases that transfer substantially all the risks and benefits of ownership are recorded as financing leases, and are included with property and equipment, accounts payable and accrued liabilities and other long-term liabilities as applicable. Per note 3 (o) of Shoppers’ financial statements, other accounts affected by leases include those related gains realized on the disposal of the real estate properties related to (financing) sale-leaseback transactions. Gains realized on the disposal of real estate properties done at fair value and that are operating in nature, are recognized within operating and administrative expenses in the consolidated statements of earnings. Executory costs such as real estate taxes, maintenance and insurance. These amounts are expensed in the period to which they relate (presumably in the related statement of earnings accounts). There are no dollar amounts reported separately for the year ended Dec. 31, 2011 on the consolidated statement of financial position and the consolidated statement of earnings.
RA20-1 (Continued)
(c) Lease payments for finance leases are included in two types of activities on the statement of cash flows: operating activities and financing activities. The portion that represents interest expense is reported in “finance expenses” of $64,038 thousand of which $6,859 thousand relates to financing leases (per note 12, prior to the amount that may have been netted off as part of “finance expense capitalized”.) Also included in operating activities (via Net earnings) would be the operating lease costs and executory costs paid. Under financing activities, the repayment of financing lease obligations representing the reduction of principle of
$2,173 thousand is shown.
(d) (in thousands)
(e) Under the contract based approach, the asset that is acquired by a lessee is not the physical property that is leased; rather, it is an intangible asset that represents the right to use the asset that is conveyed under the lease agreement. The liability is the contractual obligation to make lease payments. The asset and the obligation are initially recorded at the present value of the lease payments. For the lessee, the intangible asset is then amortized over the term of the lease on some systematic basis to earnings, and obligation is reduced by payments less the interest charge.
In the case of Shoppers, we will look at each of the leases individually:
1. Finance leases – for leases that are equivalent to in-substance acquisitions, accounting would be similar to present-day finance leases.
2. Other operating leases as lessee - Some leases that are currently operating leases may end up being capitalized, with the related leased assets representing a
