Aubry has prepared projected results for 2014 for Masson based on third-quarter results and other information she obtained from the company. She and Langer are discussing how she reflected the sale of the distribution center in her financial projections and its impact on Masson’s ratios.
Aubry explains:
- Masson is selling the distribution center for $200 million. The net book value of the center would have been $170 million at year-end therefore the company will record a $30 million gain. I reflected the gain in my projections as an increase in net income in 2014. There will be no taxes on this gain due to the availability of loss carry forwards.
- Because the sale will occur at the end of the fiscal year I took a full year’s depreciation for 2014. The $10 million in annual rent expense Masson will pay to Sequoia for the use of the center is the same as the annual depreciation expense they had been taking on the center.
- Given Masson’s stated use for the proceeds, I reduced the total liabilities.
- Assuming the sale goes through, the removal of the net book value of the center from the balance sheet will result in an increase in the company’s asset turnover and ROA.
Langer summarizes key information for the last two years along with Aubry’s projections for 2014, see Exhibit 1.
Langer finishes:
“If it is a VIE, I believe that means Masson would have to consolidate Sequoia. I wonder how that would affect your projections and our ratio calculations (which are all based on year-end balances).”
Question
If Langer is correct in his belief about Masson’s required accounting treatment of Sequoia, the revised projected ROE for Masson in 2014 would be closest to:
I get that if the sale goes through to a SPV, it means that you have to remove the $30m gain from NI (as you are the beneficiary of the SPV and the gain is tax free), this also mean that R/E and equity will decrease by this amount… But my question is if we sell the distribution center to the SPV, the SPV balance sheet will now hv $170m worth of assets. So when we consolidate, wont it show back up in the parent’s balance sheet? and we will have to balance A = L+E