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Leases – sale and leaseback Example (at fair value) – ACCA Financial Reporting (FR)

VIVA

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  1. ?

    P= PMT × (1?(1+r) -n
    __________________
    r

    PV = 1M x (1 – (1 + 0.05)-10
    ____________________
    0.05

    PV = 1M x (1 – 0.6139132535)
    _______________________
    0.05

    PV = 1M x (0.3860867465)
    ?_______________________
    ? 0.05

    PV = 386986.7465/0.05 = 7721734.93

    Round up to nearest whole number = 7721735

    Hope this helps!

    where:
    P=Present value of an annuity stream
    PMT=Dollar amount of each annuity payment
    r=Interest rate (also known as discount rate)
    n=Number of periods in which payments will be made
    ?

  3. Is there some calculation error ?
    If based on Annuity from the table 10year and 5% it will give an amount of 7.722 which multiply, it would not give 7,721,735.

    Additionally, if I take $8.4m x 77.22% the amount will only give 6,486,480 ass well.

    • There are 4 values
      DR Bank 10million
      CR Asset 8.4million
      CR Liability 7,721,735
      DR Asset 6,486,257

      the DR add up to 16,486,257 , and the CR add up to 16,121,735
      the difference of 364,522 is the gain/loss of rights transferred to the buyer
      Since the Debits are greater than the Credits, that difference was a gain on the SPL, and thus was Credited to SPL.
      hope that helped

      • Just to be exactly sure how this can be calculated. The amount used as balancing figure is the proportion of gain on the asset not leased back and can be Calculated as (1 – PV of Lease/Sale Price) * Total Gains on Sale. This is simply (1 – 77.22%) * (10m – 8.4m). Note that 77.22% is the proportion of the amount of lease-back to the sales proceeds, so the balance (1-77.22%) is not leased i.e. assumed to be with the Seller-Lessee

        (1 – 7,721,735/10,000,000) * 1,600,000 = 364,522

    • Yes!

      Just to be exactly sure how this can be calculated. The amount used as balancing figure is the proportion of gain on the asset not leased back and can be Calculated as (1 – PV of Lease/Sale Price) * Total Gains on Sale. This is simply (1 – 77.22%) * (10m – 8.4m). Note that 77.22% is the proportion of the amount of lease-back to the sales proceeds, so the balance (1-77.22%) is not leased i.e. assumed to be with the Seller-Lessee

      (1 – 7,721,735/10,000,000) * 1,600,000 = 364,522

  9. Hi every. Hello Chris Thanks for the Lecture.
    just want a clarification on the value of the total proceeds from the asset($10,000,000), since its the same as the current fair value ($10,000,000)
    in a situation where the values are different, what do i use, the Fair value or the total proceeds? thanks

    • Hi! You get 7,721,735 if you calculate PV (CF*Annuity factor) for each payment and then sum these PV up.
      Year PV
      1 952,381
      2 907,029
      3 863,838
      4 822,702
      5 783,526
      6 746,215
      7 710,681
      8 676,839
      9 644,609
      10 613,913
      ______________
      7,721,735

      Alternatively you can get total Annuity factor by calculating Annuity factor for each payment, averaging them and multiplying by 10:
      Year Annuity factor
      1 0.95
      2 0.91
      3 0.86
      4 0.82
      5 0.78
      6 0.75
      7 0.71
      8 0.68
      9 0.64
      10 0.61
      ___________
      7.722

  15. Hi sir,
    why the balancing figure a become a profit ?? if they appear in the credit side.. can you please tell me the logic behind it
    so it will be loss if the balance appear in the debit side?
    ps tell the accounting logic

    • Because income is Credit, and expense is Debit.

      Retained earnings are Credit. Getting an income eventually credits RE which means increasing RE. Expenses debits RE and reduces it.

      This is really a very basic stuff. If you have such questions maybe it would be better to review FA first…

  16. Hi Chris,

    In the example its $1M payment at end of the lease period that is 10 years so the PV should be 100k * 7.722 ? i am confused as to why do we calculate it this way..

    i watched the lecture many times but not able to understand..

    Thanks

    Manan

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