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June 2013 Q3b – Sale and Lease back query

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AAA Exams › June 2013 Q3b – Sale and Lease back query

  • This topic has 3 replies, 2 voices, and was last updated 3 years ago by Kim Smith.
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  • August 17, 2021 at 12:31 pm #631826
    parthbhanushali
    Member
    • Topics: 34
    • Replies: 20
    • ☆☆

    Following is the question:-
    (b) Sale and leaseback arrangement
    A sale and leaseback arrangement involving a large property complex was entered into on 31 January 2013.

    The property complex is a large warehousing facility, which was sold for $37 million, its fair value at the date of the disposal. The facility had a carrying value at that date of $27 million.

    The only accounting entry recognised in respect of the proceeds raised was to record the cash received and recognise a non-current liability classified as ‘Obligations under finance lease’.

    The lease term is for 20 years, the same as the remaining useful life of the property complex, and Setter Stores Co retains the risks and rewards associated with the asset. (7 marks)

    Required:
    Comment on the matters to be considered, and explain the audit evidence you should expect to find during your file review in respect of each of the issues described above.

    My Query –
    The question mentions that,”The lease term is for 20 years, the same as the remaining useful life of the property complex, and Setter Stores Co retains the risks and rewards associated with the asset.”

    This concludes that seller co. still has the right to receive risk and rewards from the assets for its remaining useful life.
    Hence, as per IFRS 15, this transfer cannot be recorded as sale (as seller has the right to receive risk and rewards from the assets for its remaining useful life.)

    In this case, it is not a sale and lease back transaction and :-
    1) Seller should still show the asset in his BOAs
    2) Amount received from buyer should be treated as a “loan” and not as a lease transaction

    Hence the Journal entry will be:-
    Cash Dr. 37m
    financial Liability Cr. 37m

    Asset should be recognized at 27m (unless the co. is planning to revalue the entire class of that asset. Single asset cannot be revalued.)

    But the Examiner answer mentions the following treatment which I feel is incorrect :-

    The following entry should have been made on the disposal and leaseback of the property complex:

    DR Cash $37 million
    CR Property, plant and equipment $27 million
    CR Deferred income $10 million

    And the asset and finance lease liability should be recognized at fair value:

    DR Property, plant and equipment $37 million
    CR Obligations under finance lease $37 million

    Please help with the correct treatment.

    August 17, 2021 at 1:22 pm #631832
    Kim Smith
    Keymaster
    • Topics: 133
    • Replies: 8301
    • ☆☆☆☆☆

    As you mention “examiner answer” and reference “2013” you seem to be looking at the original “as published” Q/A. A this is technically obsolete – both with regard to IFRS 15 and IFRS 16 you will have to disregard it.

    August 17, 2021 at 8:31 pm #631873
    parthbhanushali
    Member
    • Topics: 34
    • Replies: 20
    • ☆☆

    So if we consider the rules of IFRS 15 and 16 today, Please let me know if the following treatment will be correct or not:-

    Hence the Journal entry will be:-
    Cash Dr. 37m
    financial Liability Cr. 37m

    Asset should be recognized at 27m (unless the co. is planning to revalue the entire class of that asset. Single asset cannot be revalued.)

    August 18, 2021 at 6:45 am #631891
    Kim Smith
    Keymaster
    • Topics: 133
    • Replies: 8301
    • ☆☆☆☆☆

    Yes correct if NO sale.

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