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So I was doing this question from the AAA practice kit.
Question: On 31 March 20X5, Lifeson Co sold a property to a leasing company, Clive Co, for its fair
value at this date. The property is situated in a sought after area with a high demand
for rental properties for retail purposes. Clive Co has assessed the remaining life of the
property to be in excess of 50 years, and under the terms of the sales agreement,
Lifeson Co will lease the property back from Clive Co for a period of ten years. Lifeson Co has treated the transaction as a sale and leaseback transaction in
accordance with IFRS® 16 Leases, and derecognised the property in its financial
statements and recorded a sale in accordance with IFRS 15 Revenue from Contracts
with Customers.When I read the question I thought that recognizing the sale of property according to IFRS 15 is incorrect, right? Because IFRS 15 is used for recognizing revenue from normal business operations and this is a sale of NCA. But the answer for this question says:
In this case, the lease term of ten years appears short compared to the asset’s
remaining life which is expected to exceed 50 years and given the demand for
retail properties for rent in the area, it seems likely that Clive Co will direct the
use of and obtain substantially all of the remaining benefits from the asset
including the potential cash flows in the future.
On the basis of the information available, the proposed derecognition of the
property in Lifeson Co’s financial statements and the recording of the
transaction as a sale in accordance with IFRS 15 appears to be correct.Why is it correct?
The accounting treatment of a sale and leaseback depends on whether the transfer (“sale”) of the asset is a sale in accordance with IFRS 15:*
– if YES, the “leaseback” is a lease in accordance with IFRS 16 – i.e. recognise aq ROU asset and lease liability
– if NO, it is a financing transaction: the “proceeds” are a financial liability (IFRS 9).* What it says in IFRS 16 is “An entity shall apply the requirements for determining when a performance obligation is satisfied in IFRS 15 to determine whether the transfer of an asset
is accounted for as a sale of that asset.” So it’s looking at the PERFORMANCE OBLIGATION aspect (is it a sale?) rather than does this give rise to revenue recognition (as you correctly point out, it doesn’t, because a non-current asset sale is not in the ordinary course of business).What it says in IFRS 15 about satisfaction of performance obligations is “the entity satisfies a
performance obligation by transferring a promised good or service (ie an asset) to a customer. An asset is transferred when (or as) the customer obtains control of that asset.” It then goes on to elaborate on control e.g. “Control of an asset refers to the ability to direct the use of, and obtain substantially all of the remaining benefits from, the asset.”Please ask if that is not sufficiently clear.
So they are talking about the ‘control’ rather than the actual revenue recognition?
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