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In December 2014, a leisure centre complex was sold for proceeds equivalent to its fair value of $35 million, the related assets have been derecognised from the Group statement of financial position, and a profit on disposal of $8 million is included in the Group statement of profit or loss for the year. The remaining useful life of the leisure centre complex was 21 years at the date of disposal.
The Group is leasing back the leisure centre complex to use in its ongoing operations, paying a rental based on the market rate of interest plus 2%. At the end of the 20-year lease arrangement, the Group has the option to repurchase the leisure centre complex for its market value at that time.Dear Tutor, please explain why in this scenario IRFS15 hasn’t been met to account the transacrion as a sale?
This Q from the June 2015 exam was pre-IFRS 16 Leases, which has only been examinable since September 2017.
This is one of the reasons why we strongly recommend that you invest in a current Approved Revision Kit.
If you are relying on revising Qs as originally published, you have to accept that these have not been updated and ignore those parts of Qs and As which relate to technically obsolete topics.
This is the Q from a current Revison kit (Becker) for exams from Sep17 to June 18, so IFRS 16 was examinable then, but the answer in the kit looks inappropriate as I says IFRS wasn’t met. Anyway, in term of sale and lease back, what are those conditions that must be met? I couldn’t find any explanation in any study text.
Thank you
I happen to have a copy of Becker’s P7 Revision Question Bank for exams to June 2018 and the Q is not exactly as you have stated. In the published 2017-18 edition, the answer explains:
“The transaction should initially be considered under IFRS 15 Revenue from Contracts with Customers, to decide if a performance obligation has been met relating to the sale element of the contract. If the performance obligation has been met the physical asset (the leisure centre complex) must be derecognised and replaced with a right-of-use asset and corresponding lease liability. However, it is highly unlikely that the revenue recognition requirements of IFRS 15 have been met as the lease is for 20 years, the asset has 21 years life remaining and Adder has an option to repurchase the asset at the end of the lease term.”
Having concluded that there is no sale, the answer goes on the explain how the sale and leaseback should be accounted for as a financing arrangement in accordance with IFRS 9.
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