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Leases – sale and leaseback Example (not at fair value) – ACCA Financial Reporting (FR)

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  2. Chris, the lease liability of £7,721,735 amortizes out to zero at the implicit interest rate of 5%, but when you add the additional million in the second example. Does the implicit interest rate change or is that additional million handled separately?

  4. Thank you for the lecture, Chris.

    I have a question on the parts of this question that relate to ‘payments to be made at the end of the lease period’ and the ‘value of the total proceeds’ from the sale and leaseback.

    If $1mil. is to be made yearly in arrears for a period of 10 years, that amounts to $10mil. This is clear.

    However, if the lease period remains 10yrs and the proceeds are $9mil., shouldn’t the sum of the yearly arrears payment equal $9mil i.e., $9mil/10yrs = $0.9mill. or thereabouts annually. Same applies to when the proceeds were $11mil. in a 10yr period, $1mil. annually for 10yrs would be less than $11mil. that’s the sales proceeds. I think this would also affect our approach to solving this question. Please clarify. Many thanks.

  5. Dear Tutor

    From the previous example (sale and leaseback Example (at fair value)) you calculated – Right of use asset
    $6,486,257 = ($8400000 * 77.22%) and this 77.22% you got when you divided Liability/Proceeds ($10m).

    In this example, you rewrote – Right-of-use-asset exactly the same – 6,486,257, but we had different proceeds from Sale (Scenario1 – 9m)
    I also calculated by myself and got a different answer
    Right-of-use-asset = 7,206,953 85.80%(7,721,735/ 9,000,000) Liability/Proceeds

    Please explain why you calculated from $10m? When we have Proceeds of $9m

    Thank you!

    • I think it’s the requirement from IFRS that the seller/lessee measures the right of use of asset as a proportion of the CV based on the fair value (10m) and not from cash/proceeds received (9m or 11m)

  6. Dear Tutor / Other Members, whoever can clarify.

    When sold for $11m, higher than Fair Value, we consider it as additional financing. Therefore, Liability increases from 10 million to 11 million, and is recorded at Present Value. So, 11m over 10 years makes it 1.1m per year. For present value, we must now multiply this 1.1m with the Annuity Factor of 7.72 to get 8.49m. Why are we simply adding the additional 1m as it is to the 7.72m recorded while taking into consideration the 10m, whereas the 10m has effectively changed to 11m, and the additional 1m financing must also be discounted to PV??

  9. In the case of sales of $11m:

    If we amortize $8.72m over 10 years at $1m payment p.a, at the end of 10 years, there is still lease liability of $1.63m, so is it correct? What should we do?

  10. Hi Chris, I got question regard of the amount of the right of use asset.
    As I read through other resources. We must add the prepayment figure into right of use amount if the proceeds is below than the fair price. Which is 6,486,257 plus additional of 1M. ( a payment made /before the commencement date)

  11. Dear sir

    For the first scenario, proceed less than FV
    May I know the impact if I don’t know Dr prepayment but directly DR liability as the second scenario?
    Or I can actually do that by Dr the balancing figure in liabilities

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