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Hi Mike,
From what I know any incentives received under an operating lease arrangement will be recognized by the lessee as a reduction of the rental expense over the lease term. What about incentives received under a financing lease arrangement? Are there such incentives at all?
Repurchase agreements:
Under a repurchase agreement, if the repurchase price is lesser than the original selling price, the entity should treat it as a lease under IAS 17. Does it mean that, for example, if the company sells the asset for $5 million and has the right to repurchase it in 4 years time for $4 million, it will derecognize its asset SOFP and record rental payments of $1 million in its SOPL each year (like an operating lease?)Hoping to hear from you, thank you!
“What about incentives received under a financing lease arrangement? Are there such incentives at all?”
There may be but their effect is lost within the routine accounting for finance leases
As for the second problem …
This looks to me that the cost over 4 years is only $1 million so the annual cost is only $250,000
Does that make more sense to you?
Sorry, I don’t quite understand the second problem.. why do we recognize cost of $1 million when the entity benefits from the transaction?
What would happen to the asset? Would it decrease in value by $250,000 (in addition to any depreciation) each year?
Hoping to hear from you again, thank you 🙂
What a silly question! I hoped that I had understood it in the first place and that the cost to the company was going to be just $250,000 each year but, No, I have totally misunderstood the scenario
And what a crazy scenario it is too
Don’t worry – you’re not likely to be faced with anything this outrageous in the exam
So, you’re saying that we can sell for $500 and buy back in 4 years’ time for $400
I shall indulge your fantasies, this once
How about, on “sale” of the asset
Dr Cash $5m
Cr Loan $5mEach year, we need to:
Dr Loan $250,000
Cr statement of Income $250,000Then, after 4 years, we need to
Dr Loan $4m
cr Cash $4mI don’t believe that I have allowed myself to go so deeply into a silly scenario! !
I asked because it was written in the BPP study text that “if the repurchase price is below the original selling price, the transaction should be accounted for as a lease in accordance with IAS 17”, so thought I’d come up with an example since there was no explanation nor example given in the text.
Apologies for asking this silly question, thanks for the help 🙂 🙂
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