AAAP7 INT
Syllabus D. Audit of Historical Financial Information D3. Evaluation and review

D3a. Sale and leaseback 19 / 41

Sale and Leaseback

Let’s have a little ponder over this before we dive into the details…

So - the seller makes a sale (easy) BUT remember also leases it back - so the seller becomes the lessee always, and the buyer becomes the lessor always

Seller = Lessee (after)
Buyer = Lessor (after)

However, If we sell an item and lease it back - have we actually sold it? Have we got rid of the risk and rewards?

So the first question is..

Have we sold it according to IFRS 15? (revenue from contracts with customers)

Option 1: Yes - we have sold it under IFRS 15

This means the control has passed to the buyer (lessor now)

But remember we (the seller / lessee) have a lease - and so need to show a right to use asset and a lease liability

Step 1: Take the asset (PPE) out

Dr Cash
Cr Asset
Cr Initial Gain on sale

Step 2: Bring the right to use asset in

Dr Right to use asset
Cr Finance Lease / Liability
Dr/Cr Gain on sale (balancing figure)

  • How much do we show the Right to Use asset at?

    The proportion (how much right of use we keep) of our old carrying amount 

    The PV of lease payments / FV of the asset x Carrying amount before sale

  • How much do we show the finance liability at?

    The PV of lease payments

Example

A seller-lessee sells a building for 2,000. Its carrying amount at that time was 1,000 and FV 1,800

The seller-lessee then leases back the building for 18 years, for 120 p.a in arrears. 

The interest rate implicit in the lease is 4.5%, which results in a present value of the annual payments of 1,459

The transfer of the asset to the buyer-lessor has been assessed as meeting the definition of a sale under IFRS 15.

Answer

Notice first that the seller received 200 more than its FV - this is treated as a financing transaction:

Dr Cash 200
Cr Financial Liability 200

Now onto the sale and leaseback..

Step1: Recognise the right-of-use asset - at the proportion (how much right of use we keep) of our old carrying amount 

Old carrying amount = 1,000
How much right we keep = 1,259 / 1,800 (The 1,259 is the 1,459 we actually pay - 200 which was for the financing)

So, 1,259 / 1,800 x 1,000 = 699

Step 2: Calculate Finance Liability - PV of the lease payments 

Given - 1,259

So the full double entry is:

Dr Cash 2,000
Cr Asset 1,000
Cr Finance Liability 200
Cr Gain On Sale 800

Dr Right to use asset 699
Cr Finance lease / liability 1,259
Dr Gain on sale 560 (balance)

Option 2: It's not a sale under IFRS 15

So the buyer-lessor does not get control of the asset

Therefore the seller-lessee leaves the asset in their accounts and accounts for the cash received as a financial liability. 

The buyer-lessor simply accounts for the cash paid as a financial asset (receivable).