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This question deals with revenue recognition.
I’m interested in part (b)
From the answer it would appear that if you sell an asset with a buyback option that you don’t exercise, you still have to recognise on revenue an “interest cost” equivalent to the premium that would have been paid had you exercised the option.
Really? You flog something, DON’T buy it back, yet your tax position suffers because IFRS 15 has you recognising interest on your disposal proceeds?!
Blimey, is this right?
Yes, it’s right. You are effectively borrowing the $500,000 hence the financial liability and if there is a financial liability then there will be an interest expense. I’m no tax expert but does that not improve your tax position as it is lowering your profits?
Well the big question is that as the $50,000 forms part of “revenue” for the asset sold, does the extra £50,000 form part of the disposal proceed for tax purposes?
If it does then it’s going to reduce the tax pool for WDAs (albeit you get one year’s tax relief on the $50,000 interest expense I assume)
Like I said, I’m no tax expert so wouldn’t know about the tax treatment.