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Hi
I wonder if you could solve a question that just won’t leave my mind.
In part (c) of Havanna (Q2 Dec 13) we are asked to look at the accounting treatment at four different sales prices for a sale and leaseback. If we take the second price of 6 million for example, we see that it leaves 1 million to be deferred and amortised. IAS 17 states the below in this situation when the lease is classified as an operating lease –
“if the sale price is above fair value – the excess over fair value should be deferred and amortised over the period of use”
The question however only gives us the period of the lease – 10 years, not the period the asset is expected to be used as required by the IAS. There’s no suggestion that the expected period of use is the same as the lease period in the question and since the asset is a building it is particularly unlikely that the period of use is only 10 years. The solution goes ahead and uses this as the useful life and amortises it over 10 years anyway.
Am I missing something?
Many thanks
Shouldn’t this amortisation be over the shorter of the lease period and the estimated useful life of the asset?
I believe that that answers it!
I’d have thought so but the text of the IAS doesn’t seem to say that
Thanks anyway, much appreciated
It’s classified as an operating lease so it’s not for the whole or substantially the whole of the asset’s life. Therefore only the lease term is appropriate
Here’s an extract from the standard:
“for operating leases, the lease payments should be recognised as an expense in the income statement over the lease term on a straight-line basis, unless another systematic basis is more representative of the time pattern of the user’s benefit [IAS 17.33]”
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