No sale lease

Hello Mr chris,

Here there is a lease and the question said that the plant was sold but the answer said that we will not consider it as a sale even though we have sold it so how is that.

please clarify as the lease sometime became very tricky situations.

Thanks,

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Q

109 Tourmalet Co sold an item of plant for $50 million on 1 April 20X4. The plant had a carrying amount of
$40 million at the date of sale, which was charged to cost of sales. On the same date, Tourmalet Co entered
into an agreement to lease back the plant for the next five years (being the estimated remaining life of the
plant) at a cost of $14 million per annum payable annually in arrears. An arrangement of this type is
normally deemed to have a financing cost of 10% per annum. Tourmalet Co retained the rights to direct the
use of, and retain substantially all the remaining benefits from, the plant.
Using the drop down box, select what amount will be shown as income from this transaction in the
statement of profit or loss for the year ended 30 September 20X4?
?
Picklist
Nil
$10 million
$40 million
$50 millio

Answer

109 Nil
Tourmalet Co can direct the use of and obtain substantially all of the remaining benefits from the plant, so this
does not meet the IFRS 15 criteria to be recognised as a sale. This is in substance a secured loan, so the asset
will continue to be recognised at its carrying amount of $40m and a lease liability will be set up for $50m.