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Hello Mike
Hope you are fine.
My questions is about sale and finance lease back , specifically when SP < FV, because of lower rental payment. I refer you to the Illustration 1 of chapter 9 of your P2 notes, asset number 2. It is :
SP = 8,600
CV = 8,000
FV = 9,000
Rentals = 2,000
Operating lease term = 4 yearsOK! We should recognise 600 immediately. Now what is your meaning by ” If low rentals negotiated, the FV excess over SP is automatically spread over the 4 year rental period.”
Do you mean the following?We should recognise an asset called ”Deferred loss=400” .
and at the end of each year we should :
Dr Deferred loss (P&L) 100
Cr Deferred loss(SOFP) 100Thank you in advance
Kind RegardsHi Yellow
Number 1, I believe that your second sentens should read “operating lease back” and not “finance lease back”
Now, the real meat!
If fair value is $9,000, why would we sell for just $8,600? The presumption is that we have negotiated a reduced annual lease payment.
If we had sold for fair value, that $2,000 pa payment would have been greater so the “missing” extra profit that we COULD have made is automatically benefitting the four years involved by only having to pay reduced rentals
Is that ok?
Hello Mike
Thank you with your reply.Yeah, that is sale and operating lease back 😉 .
But about the real meat! I feel I have got it! I think the key word is “automatically”. For examplt fair rental payment is say $2500 but because we are selling the asset below its fair value so we are paying $2000 instead of $2500 for rent! Yeah?
Many thanks
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