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Hello tutor,
In a sale and leaseback transaction where the sales proceeds is lower than the fair value and thus giving rise to a prepayment, do we add this to the present value of lease liability?
Or do we simply recognise this as a financial asset? Will this affect the annual cash rentals paid?
I can only find detailed treatments of additional financing online but none of them did more than simply stating a prepayment would be recognised if the sales proceeds were lower. Hoping to hear from you, thanks again.
Hi,
Yes, don’t stress about it too much and recognise it as a prepayment. Effectively the release of the prepayment in the future is to be able to match it up to any expense in profit or loss so that it then brings the overall expense back to a market value equivalent.
You do not need to add it in to any of the PV of the lease liability.
Thanks
Dear tutor,
Thank you for your lectures. Just a short question, In sale and leaseback when we have to recognise a prepayment (because the proceeds is less than the fair value of the asset), then we have to amortise it over the lease term on the straight line basis ? yes?
I mean for example we have to recognise a prepayment = 10M and the lease period is for 10 years. So we should amortise it over 10 years, releasing 1M to P&L each year? Am I correct?
Also is there any rule here about the amortisation useful life? I mean we have to amortise over the lease period or shorter of lease period and useful life of the asset? or can we use reducing balance method instead of straight line method?
Thank you for your help in advance
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