Chapter 18: Leases (IFRS 16)

Example 7 - Sale and leaseback. Damson required funds to finance a new rebranding exercise. Its only possible way of raising finance is through the sale and leaseback of its head office building for a period of 10 years, with lease payments of $1 million made at the end of each year. The current fair value of the building is $10 million and its carrying value is $8.4 million. The interest rate implicit in the lease is 5%, and the present value of the lease payments at that rate is $7,721,735. The building is sold at its fair value of $10 million. Consider the two cases where the transfer (i) does not satisfy the performance obligations for a sale and (ii) does.

Example 6 - Finance lease. Cherry leases out an item of property, plant and equipment under a 5 year finance lease. The lease commenced on 1 January 2015 and the rate implicit in the lease is 4% (discount factors: year 1 0.962, year 2 0.925, year 3 0.889, year 4 0.855, year 5 0.822). The annual lease rentals of $5,000 are paid at the start of each year. Cherry estimates that the unguaranteed residual value of the PPE at the end of the lease is $400.

Example 5 - Operating leases. Banana leases out a machine to Guava under a four year operating lease. The annual lease rentals are $2,000 payable in arrears. As an incentive, Banana grants Guava a rent-free period in the first year.