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Hello Chris, hope you are doing fine.
this is my doubt,
Q) On 1 January 20X6. Sidcup Co sold its head office building to Eltham Co for $3 million and
immediatel!J leased it back on a 10-year lease. On that date, the carrying amount of the buildingwas $2.6 million and its fair value was $3 million. The present value of the lease payments was
calculated as $2.1 million. The remaining useful life of the building at 1 January 20X6 was 15
years. The transaction constituted a sale in accordance with IFRS 15.Required
A right-of-use asset must be recognised in respect of the leased building. At what amount should this right-of-use asset be recognised on 1 January 20X6 in the financial statements of Sidcup Co?
Answer given in the back:
Sidcup only recognises the amount of gain that relates to the rights transferred.
Stage 1: Gain is $3,000,000 – $2,600,000 = $400,000
Stage 2: Gain relating to rights retained $(400,000 x 2,100,000/3,000,000) = $280,000
Stage 3: Gain relating to rights transferred $(400,000 – 280,000) = $120,000
doubt:
I calculated the value of the right of use asset as $1,820,000 using your method; it appears that they are only considering the gains related to the rights transferred.
Could you clarify why they only recognized the transferred rights and not the value of the right of the use asset?Hi,
Do they not then go on to calculate the value of the right of use asset within the answer?
Thanks
It was an OTQ, although the value of the right of use asset ($ 1,820,000) was included in the options, the correct option was the gains on the rights transferred ($ 120,000).
The following is the full answer given in the back:
The correct answer is: $120,000
IFRS 16 requires that, at the start of the lease, Sidcup should measure the right-of-use asset
arising from the leaseback of the building at the proportion of the previous carrying amount of
the building that relates to the right of use retained. This is calculated as carrying amount x
discounted lease payments/fair value. The discounted lease payments were given in the question
as $2.1 million.Sidcup only recognises the amount of gain that relates to the rights transferred.
Stage 1: Gain is $3,000,000 – $2,600,000 = $400,000
Stage 2: Gain relating to rights retained $(400,000 x 2,100,000/3,000,000) = $280,000
Stage 3: Gain relating to rights transferred $(400,000 – 280,000) = $120,000
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