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Question 5: (10) You work for RP, a manufacturing entity, and have received the following email from the Managing Director: "The Board has been discussing ways that it can raise some additional finance. We have decided that the best option will be to enter into sale and leaseback arrangements for some of our more significant assets. It will result in a cash inflow to the business whilst allowing us to continue using the assets which are a necessary part of our organisation. We have discussed one arrangement with the bank already. The bank has agreed to pay us R3.5 million for one of our biggest items of plant and will then lease it back to us for the next 15 years. The carrying value is only R2 million and therefore this arrangement particularly appeals to me as, not only will we receive a significant cash inflow, but it will also immediately boost our current year profit by R1.5 million. We would also not suffer any further depreciation charges, although I appreciate that there would be a rental charge instead. Another ideal thing about this arrangement is that we would not have to reflect a liability on our statement of financial position. The Board are a little concerned that our gearing level is already high enough. I would therefore like you to go ahead and make the necessary arrangements." Required: Prepare a response to the above email, explaining to the Managing Director the potential consequences of the sale and leaseback arrangement on the financial statements of RP

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