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The company is planning to open 20 new stores in south east Asia in the next year. To assist in financing the expansion, the company sold a number of its properties on 28 September 2006 for $200m and leased them back under operating leases. (7 marks)
AUDIT EVIDENCE
Candidates need to focus on checking whether the leaseback is really an operating lease rather than a finance lease.)
I would expect to see:
a copy of the leasing contract
a schedule comparing the present value of the minimum lease payments with the fair value of the leased assets
a note comparing the length of the lease with the estimated useful life of the assets, and stating whether Yummy Mummy Co. is responsible for maintenance and insurance
a schedule calculating the amounts that should appear in the financial statements, if the audit team believes this to be a finance lease
an estimate of the carrying value of the assets at the date of sale, if the lease is an operating lease (if selling price is not fair value, it affects how profit on sale is recognised)
a point in the management representation letter on the purchaser of these properties, and whether they are related to Yummy Mummy Co. and, if necessary, a draft of the related party disclosures that will appear in the financial statements.ISNT NEW STANDARD TREAT ALL LEASES AS OPERATING LEASE???
You appear to be looking at a Q which has not been updated for IFRS 16. Under IFRS 16 – from a lessee perspective – with only 2 notable exceptions (short-term leases and low-value leases) – all leases are treated as FINANCE leases (i.e. “on balance sheet”).
The distinction between operating and finance is now only relevant for lessor accounting (which is not examinable at this level).
(IAS 24 is also not examinable.)
@kim2311 said:
You appear to be looking at a Q which has not been updated for IFRS 16. Under IFRS 16 – from a lessee perspective – with only 2 notable exceptions (short-term leases and low-value leases) – all leases are treated as FINANCE leases (i.e. “on balance sheet”).The distinction between operating and finance is now only relevant for lessor accounting (which is not examinable at this level).
(IAS 24 is also not examinable.)
so for sale and lease back above audit evidences are okay
It is not correct as written because it says “… if … a finance lease” … “… if an operating lease …”.
The key issue for accounting for a sale and leaseback under IFRS 16 is whether or not the revenue recognition criteria of IFRS 15 have been met.
(1) If the revenue recognition criteria of IFRS 15 are met the seller (lessee) will:
– Recognise the cash received;
– Derecognise the asset sold;
– Recognise a right-of-use asset for the asset leased back;
– Recognise the lease liability; and
– Recognise any gain or loss, but only on the portion of the asset transferred to the buyer (lessor).
If the asset is sold at a price that differs from its fair value the seller must adjust the sale proceeds to fair value by:
– adding a prepayment, if sold at a below-market price; or
– deducting additional financing if sold at an above-market price.
(2) If the criteria of IFRS 15 are NOT met then NO sale can be recognised and the asset cannot be derecognised. Instead the seller must apply IFRS 9 Financial Instruments
and recognise a financial liability in respect of the proceeds received (i.e. account for it as a loan).@kim2311 said:
It is not correct as written because it says “… if … a finance lease” … “… if an operating lease …”.The key issue for accounting for a sale and leaseback under IFRS 16 is whether or not the revenue recognition criteria of IFRS 15 have been met.
(1) If the revenue recognition criteria of IFRS 15 are met the seller (lessee) will:
– Recognise the cash received;
– Derecognise the asset sold;
– Recognise a right-of-use asset for the asset leased back;
– Recognise the lease liability; and
– Recognise any gain or loss, but only on the portion of the asset transferred to the buyer (lessor).
If the asset is sold at a price that differs from its fair value the seller must adjust the sale proceeds to fair value by:
– adding a prepayment, if sold at a below-market price; or
– deducting additional financing if sold at an above-market price.
(2) If the criteria of IFRS 15 are NOT met then NO sale can be recognised and the asset cannot be derecognised. Instead the seller must apply IFRS 9 Financial Instruments
and recognise a financial liability in respect of the proceeds received (i.e. account for it as a loan).thank you so much Kim for the detail reply..thats so kind of you…
just one more question……
so for the simple lessee accounting(not the sale and lease back) it will be a finance lease. and for short-term (is it less than 12 months?) it will be operating….am I right
Kind of – but as I said the terms “finance lease” and “operating lease” are obsolete for lessee accounting (which is all that is examinable in F7) so should be avoided.
For simple lessee accounting the treatment now is to recognise a “right-of-use” asset and a lease liability.
The exceptions to this are rental/lease payments for short-term leases and leases of assets with a low value which are expensed to profit or loss; no asset or liability is recognised other than prepayments or accruals.
are you talking about F8 or P7??, as far as i know, examinable accounting standards of F8 is that of F3, and leases is not one of them , so its not examinable ?
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